08 Oct Maintaining the Corporate Form: Avoiding Individual Liability When Signing Contracts
By Michael A.H. Schoenberg, Esq.
Ever since the formation of the East India Company in 1600, entrepreneurs have relied on the corporate form to conduct their business. Over the centuries, the corporate form in the United States has evolved into what we generally know of today as corporations, limited liability companies, and partnerships. Each form has its set of advantages and disadvantages, but, just like the East India Company, common among them all is the principal goal of the owners to avoid personal liability for the debts and obligations of their business.
It has long been the law in New York that a corporation exists independently of its owners, as a separate legal entity. Corporations, however, cannot act on their own; they need human involvement to conduct their business, such as signing sales contracts or loan agreements. Recognizing this, courts generally find that officers and owners of a corporation do not make themselves personally liable for the corporation’s obligations when they sign a contract on behalf of the corporation unless their intent to be bound individually is clear.
In determining the signer’s intent to act on behalf of the corporate entity or individually, the court will first look at the signature block. That is exactly what Justice Scarpulla of the New York County Commercial Division did in her September 13, 2018 decision in Level Group Inc. v. Smart Merchants Inc., 2018 NY Slip Op 32259(U), holding that an officer was not personally liable under a contract he signed on behalf of his company.
In Level Group, the plaintiff, a real estate broker, entered into a brokerage agreement with Smart Merchants, the owner of certain property. After the property was sold, Level sued both Smart Merchants and its owner, Charles Kim, for the brokerage fee. Kim moved for summary judgment claiming that he was not individually liable for Smart Merchants’ obligations under the brokerage agreement with plaintiff.
The Court agreed with Kim and dismissed the claims against him, finding that:
The portion of the Letter Agreement that Kim signed is in the following form:
“Accepted and agreed to, Smart Merchants Incorporated By:
Chung Chan Kim, President.”
Kim’s signature follows the word “By.” This signature was made in Kim’s corporate, not individual, capacity. Defendants have thus established their entitlement to judgment as a matter of law on the portion of its cross-motion for summary judgment to dismiss Level’s breach of contract claim against Kim individually.
In opposition, Level argues that Kim may be personally liable for the breach of the Letter Agreement because, by signing the Letter Agreement — which defines SMI as “SMI and all entities which whether directly or indirectly, are controlled by SMI or any person or entity with a direct or indirect interest in any of the foregoing” — Kim clearly expressed his intent to be bound individually. This argument is meritless.
Level has not offered any “direct and explicit evidence of actual intent” of Kim’s intent to be bound in his individual capacity to the Letter Agreement. Therefore, Defendants’ cross-motion for summary judgment dismissing the first cause of action against Kim is granted, and Level’s motion for summary judgment is denied.
Forming a business entity is just the first of many steps in using the corporate form to protect personal assets from being caught up in the business. Once the entity is formed, its existence separate and apart from its owners and officers must be maintained scrupulously. This includes making sure that all of the business’s contracts are signed by individuals in their corporate, not individual, capacity. Anything less can have disastrous financial consequences for those individuals.