Equipto Div. Aurora Equipment Co. v. Yarmouth

• Decision Date: 18 October 1996
• Docket Number: No. 18785-0-II,18785-0-II
• Court: Washington Court of Appeals
• Parties: EQUIPTO DIVISION AURORA EQUIPMENT COMPANY, Respondent, v. Jerry YARMOUTH, dba J & R Interiors, Inc., Appellant.

Page 817

83 Wn.App. 817

924 P.2d 405

EQUIPTO DIVISION AURORA EQUIPMENT COMPANY, Respondent, v. Jerry YARMOUTH, dba J & R Interiors, Inc., Appellant.

No. 18785-0-II.

Court of Appeals of Washington Division 2.

Oct. 18, 1996.

Ross Edwin Taylor, Tacoma, for Appellant.

Arnold Bruce Robbins, Breskin & Robbins, Seattle, for Respondent.

MORGAN, Judge.

Equipto Division of Aurora Equipment Co. sued Jerry Yarmouth, claiming he was personally liable for the price of a work bench purchased in the name of his closely held corporation, J & R Interiors, Inc. Equipto then moved for summary judgment, which the trial court granted. Yarmouth appeals, but we affirm.

On May 23, 1990, the Secretary of State issued a certificate of incorporation to J & R Interiors, Inc. Yarmouth "was shown as both the president and secretary of the corporation." ¹ He also was its sole shareholder. ²

J & R failed to file annual reports and pay annual fees. As a result, it was administratively dissolved by the Secretary of State, effective August 19, 1991. ³

In November 1992, Yarmouth bought a work bench from Equipto. ⁴ He represented that he was acting as agent for J & R. The bench was delivered but not paid for. On May 31, 1993, more than $18,000 was still owed.

In March 1994, Equipto sued Yarmouth for the unpaid amount plus interest. Yarmouth did not deny that a debt was owed. He alleged, however, that the debt was owed only by J & R, and that Equipto was claiming more than the amount actually due.

In August 1994, Equipto moved for summary judgment. Yarmouth then learned, apparently for the first time, that J & R had been administratively dissolved three years earlier. According to his affidavit, he

immediately contacted the Secretary of State's office to confirm and/or reinstate J & R Interiors, Inc. [He] was told that because more than two years had passed, [he] would have to pay a new filing fee and file new Articles to reinstate J & R Interiors, Inc. as opposed to simply paying the past due filing fees.[ ⁵

Yarmouth took the suggested steps on August 26, 1994. Within a short time, the Secretary of State issued a certificate of incorporation to a new corporation called J & R Interiors, Inc. Throughout our discussion, "J & R" refers to the original J & R Interiors, Inc., unless otherwise indicated.

In September 1994, Yarmouth responded to Equipto's motion by asserting, in a responsive affidavit, that he had "reinstated J & R Interiors, Inc. by filing new Articles of Incorporation and paying the filing fee." ⁶ Additionally, he claimed that he was entitled to a credit in the amount of $1,624.58.

At a hearing on October 7, 1994, Equipto conceded a credit in the amount claimed by Yarmouth. The trial court then granted Equipto's motion for summary judgment in the total amount of $21,163.27.

On appeal, the core question is whether an agent, Yarmouth, who contracts with a third party, Equipto, in the name of a principal, J & R, can be held personally liable on the contract. ⁷ As Yarmouth correctly argues, this question is not addressed in the statutes. Hence, we look to the common law.

At common law, the liability of a person who purports to contract in the name of a principal can be governed by any one of several rules. First, a person who purports to contract in the name of a nonexistent or fictitious principal becomes liable on the contract, subject to exceptions not pertinent here. ⁸ The rule is based on "an inference that a person intends to make a present contract with an existing person." ⁹ Therefore, "the parties intend that the person signing as agent should be a party, unless there is some indication to the contrary." ¹⁰

Second, a person who purports to contract in the name of a principal that exists but lacks capacity to contract may be liable on the contract, but only if he or she (a) affirmatively misrepresents the principal's capacity, or (b) knows or should know of the principal's lack of capacity, and the other contracting party does not.

The liability of an agent who enters into a contract in the name of a fictitious or nonexistent principal is somewhat different from that of an agent who enters into a contract for a principal who is incompetent or under some legal disability, such as infancy, so that the contract may be later disaffirmed by or on behalf of such principal. An agent of one who lacks the capacity to contract is not necessarily liable on the contract, for an agent does not impliedly warrant that his principal has full contractual capacity any more than he impliedly warrants that his principal is solvent. If the agent misrepresents the capacity of his principal to contract, the agent is liable as for any other misrepresentation, whether the misrepresentation is tortious or innocent; but in the absence of misrepresentation, it must appear, in order to hold the agent personally liable, that the agent knew or had reason to know of his principal's lack of capacity, and it must further appear that the other contracting party was in ignorance thereof.[ ¹¹

Third, a person who contracts in the name of a principal that exists and has capacity to contract is not liable on the contract so long as he or she fully or partially discloses the principal and has authority to contract. ¹² The person may be liable, however, if one or more of these conditions is not met. ¹³

To apply these rules here, we first ask whether J & R was in existence when, in November 1992, Yarmouth purchased the work bench. The Legislature has provided that a corporation shall continue in existence after an administrative dissolution. ¹⁴ Here, then, J & R was in existence in November 1992, notwithstanding its administrative dissolution in August 1991.

We next ask whether J & R had capacity to contract when, in November 1992, Yarmouth purchased the work bench. The Legislature has provided that even though an administratively dissolved corporation continues in existence, it "may not carry on any business except that necessary to wind up and liquidate its business and affairs...." ¹⁵ Here, Yarmouth purchased the work bench as part of J & R's ongoing business, and not for the purpose of winding up its affairs. ¹⁶ Accordingly, J & R lacked capacity to form the contract in issue here.

We next ask whether J & R's capacity to contract was restored at any relevant time. According to the statute in effect between 1990 and 1995, an administratively dissolved corporation could be reinstated within two years after the effective date of the dissolution. ¹⁷ Reinstatement "relates back to and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred." ¹⁸ In other words, reinstatement cures, retroactively, any lack of capacity to contract due to administrative dissolution. In this case, however, J & R was not reinstated within the time allowed by law, and its lack of capacity to contract was never cured.

Because J & R was in existence but lacked capacity to contract, the second of our three common law rules applies. It is not contended that Yarmouth affirmatively misrepresented J & R's lack of capacity to contract, or that Equipto knew of J & R's lack of capacity to contract. Accordingly, the question becomes whether a reasonable person in Yarmouth's shoes would have known of J & R's lack of capacity to contract with Equipto. The answer is yes, as a matter of law, for reasonable minds could not differ. Although Yarmouth was dealing with Equipto in his role as contracting agent for J & R, he was, at the same time, the president, secretary and sole shareholder of J & R. In the latter roles, he had the right to know, and the means of knowing, whether J & R had filed its annual reports and paid its annual fees. More importantly, a reasonable person standing in his shoes would have known of J & R's administrative dissolution and of its consequent lack of capacity to contract. We conclude that Yarmouth should have known of J & R's lack of capacity to contract, that he failed to disclose such lack to Equipto, and that he is personally liable for the work bench. ¹⁹

Affirmed.

SEINFELD, C.J., and TURNER, J., concur.

1 Br. of Appellant at 2.

2 Br. of Appellant at 1.

3 Notice of the pending dissolution was sent to the corporation's registered agent. He had moved, and no one had notified the Secretary of State.

4 Yarmouth's major purchase, that of the work bench, was made in November 1992. According to the record, additional, relatively minor purchases may have been made during the first four months of 1993. For convenience, we refer only to the work bench, and only to a purchase date of November 1992. The other items make no difference to the issues on appeal.

5 Clerk's Papers at 25.

6 Clerk's Papers at 25.

7 Although Yarmouth seems to argue to the contrary, this question has nothing to do with piercing the corporate veil. Our discussion would be the same if Yarmouth had been acting as agent for an individual principal, rather than a corporate principal, assuming of course that each existed but lacked capacity to contract. The fact that Yarmouth happened to be president, secretary and sole stockholder of J & R is material only insofar as it indicates what Yarmouth knew or should have known about J & R's lack of capacity to contract (or, alternatively put, what a reasonable person standing in Yarmouth's shoes would have known about J & R's lack of capacity to contract).

8 Goodman v. Darden, Doman & Stafford Assocs., 100 Wash.2d 476, 478-79, 670 P.2d 648 (1983); White v. Dvorak, 78 Wash.App. 105, 114-15, 896 P.2d 85 (1995); American Seamount Corp. v. Science and Engineering Assocs., Inc., 61 Wash.App. 793, 798-99, 812 P.2d 505, review denied, 117 Wash.2d 1024, 820 P.2d 510 (1991); 3 Am.Jur.2d Agency § 306 at 810-11 (ed. 1986); Restatement (Second) of Agency § 326 (ed. 1958). Am.Jur. § 306 states:

As a general rule, one who contracts as an...