EQUIPTO DIV. AURORA EQUIP. v. Yarmouth

Citations: 950 P.2d 451; 134 Wash. 2d 356Docket: 64863-8, 65053-5

Court: Washington Supreme Court; February 5, 1998; Washington; State Supreme Court

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Jerry Yarmouth, sole shareholder and director of the dissolved corporation J. R Interiors, Inc., sought review of two summary judgments that held him personally liable for debts incurred by the corporation. J. R was administratively dissolved in 1991 due to failure to pay an annual license fee and file an annual report, with Yarmouth claiming he never received notice of this dissolution. He continued to operate the business believing it was intact and incurred nearly $20,000 in debt to Equipto Division Aurora Equipment for a workbench. Equipto sued Yarmouth personally for the outstanding debt, asserting that he was liable despite the corporation's dissolution. Yarmouth argued that the debt should be the responsibility of J. R, not himself, and that he only learned of the dissolution when served with Equipto's summary judgment motion in 1994. After discovering the dissolution, he attempted to reincorporate but was informed he could only start a new corporation. The trial court ruled in favor of Equipto, and the Court of Appeals upheld this decision. However, the Supreme Court of Washington reversed both judgments and remanded for further fact-finding, indicating issues surrounding the validity of Yarmouth's notice of dissolution and his operational status of the corporation required further examination.

Draper Shade. Screen Co. v. Yarmouth centers on Yarmouth being held personally liable for over $16,000 in outstanding bills for merchandise ordered by J. R, a corporation that had been administratively dissolved. The trial court granted summary judgment in favor of Draper Shade. Yarmouth appealed, and the appeal was consolidated with another case, requiring the court to view facts favorably to Yarmouth. The issues of law are reviewed de novo. The document references a comprehensive analysis by Thomas G. Fischer regarding post-dissolution liability across various states and notes that many states follow the Model Business Corporation Act (MBCA), which Washington’s former corporate law was based on. However, post-dissolution liability case law varies widely among jurisdictions.

Washington State revised its corporate act in 1989, replacing the former RCW 23A with RCW 23B, which aligns with the 1984 Revised Model Business Corporation Act (RMBCA). Few cases have addressed the relevant sections of RCW 23B. Key to the case is the administrative dissolution process under RCW 23B.14.200-.220. J. R was properly incorporated but failed to fulfill its annual obligations, leading to its administrative dissolution in August 1991. The law allowed for reinstatement within two years if deficiencies were corrected, but this window closed in 1993 without action from J. R. Post-dissolution, the corporation could only engage in activities necessary to wind up its affairs.

In 1994, Yarmouth was required by the Secretary of State to create a new corporation to reinstate J. R, as the two-year reinstatement period had expired. However, a 1995 legislative amendment extended the reinstatement window to five years, reflecting concerns that the previous two-year limit was too short and led to negative consequences from unintended dissolutions. If J. R had applied for reinstatement after the amendment, he would have qualified within the new timeframe.

The potential for retroactive application of this amendment was noted, as remedial amendments relating to practice or procedure may be applied retroactively, although no party raised this argument, and it was deemed unnecessary for the resolution of the case. 

In the case of Equipto, the Court of Appeals found that Yarmouth’s actions constituted ultra vires acts since they continued business after J. R's dissolution, leading to a determination that Yarmouth lacked the capacity to contract. The court invoked a common law agency principle regarding liability for contracting on behalf of an entity that lacks capacity, concluding Yarmouth should have been aware of J. R's dissolved status and thus held personally liable.

The current matter questions whether RCW 23B.02.040, which addresses liability for acting on behalf of a corporation without proper authority, governs Yarmouth's liability, potentially excluding the application of common law agency principles. This statute imposes joint and several liabilities on individuals acting for an unincorporated entity, barring claims from those who also knew of the lack of incorporation. The court intends to interpret RCW 23B.02.040 broadly, without limiting its application to pre-incorporation scenarios.

RCW 23B.02.040 addresses liability for actions taken on behalf of a corporation that is either not yet incorporated or has been dissolved. The statute specifies that individuals acting as or for a corporation are jointly and severally liable for liabilities incurred during such actions. In this case, Yarmouth acted on behalf of J. R., a dissolved corporation, and thus could be held liable. The statute's language suggests that individuals could be liable if they acted while knowing there was no valid incorporation, which raises the question of whether this applies only to pre-incorporation actions or also to post-dissolution actions. 

Yarmouth argues for a broad interpretation that includes liability for actions taken after a corporation's dissolution, noting that a dissolved corporation exists solely to wind up its affairs and is prohibited from conducting other business. The statute does not define "incorporation," but the conditional nature of dissolution allows for potential reinstatement, which complicates the interpretation of when incorporation ceases to exist. Yarmouth’s position is supported by case law, particularly the case of White v. Dvorak, which indicated that individuals acting on behalf of a dissolved corporation can still be held personally liable for contracts made during that time.

The court indicated that the plaintiff might be liable under RCW 23B.02.040, prompting a discussion on whether such liability grants the plaintiff standing to enforce the contract. Ultimately, the court opted to analyze the issue under common law, rendering the statutory analysis as dicta. However, the court noted that prior cases suggest RCW 23B.02.040 could apply after dissolution, aligning with the legislative history surrounding the Washington Business Corporation Act (WBCA). Legislative comments from the Corporate Act Revision Committee, included in the Senate Journal, highlight the intent to abolish the de facto corporation and corporation-by-estoppel doctrines, emphasizing the need to protect those who acted in good faith believing a corporation was still active. The case at hand involved Yarmouth, who believed his corporation was not dissolved and took corrective action upon realizing it was. Conversely, individuals aware of a dissolution who continue to act on behalf of the corporation risk personal liability under RCW 23B.02.040. The historical context of RCW 23B.02.040 traces back to former RCW 23A.44.100(1), which held that individuals acting as a corporation without authority could be jointly and severally liable for debts incurred. Notably, the former statute contained a provision exempting individuals from personal liability if the corporation was reinstated within two years of dissolution, implying that those who did not reinstate within this timeframe would be personally liable. Case law has consistently applied this principle to post-dissolution situations, confirming such liabilities and the standing to contest related financial obligations.

Corporate officers who fail to pay the annual license fee for three consecutive years may be held personally liable for the corporation's business activities, as established in Tagliani v. Colwell. Similar principles are echoed in Steenblik v. Lichfield, which notes that many jurisdictions impose liability on individuals acting on behalf of a corporation after its dissolution under statutes akin to former RCW 23A.44.100. Current RCW 23B.02.040 is derived from this earlier statute, suggesting its applicability to post-dissolution scenarios unless explicitly stated otherwise.

Former RCW 23A.44.100(1) imposed joint and several liabilities on individuals acting without authority, whereas RCW 23B.02.040 requires that individuals knowingly act on behalf of a corporation that is not incorporated. The knowledge element is emphasized in the statute's official comment, which aims to protect those acting in good faith and to eliminate common law doctrines like de facto corporations and corporation by estoppel. The absence of references to limiting liability to pre-incorporation activities indicates that the statute remains relevant to post-dissolution contexts.

The common law doctrine of de facto corporations informs this interpretation, as it has been historically applied post-dissolution, protecting officers and directors who believe in good faith that the corporation's charter remains valid. Thus, considering the language of the statute, historical context, and legal precedents, RCW 23B.02.040 is found to apply to post-dissolution transactions that contravene statutory winding-up requirements.

Yarmouth's liability to Equipto and Draper Shade hinges on the interpretation of RCW 23B.02.040, specifically whether it necessitates actual knowledge of a corporation's dissolution to impose personal liability. Jurisdictions with similar statutes have determined that the phrase "knowing there was no incorporation" requires actual knowledge. Notable cases such as *Sivers v. R. F Capital Corp.* and *Harris v. Looney* confirm that personal liability is contingent upon the individuals' knowledge of the lack of incorporation. The interpretation aligns with the Corporate Act Revision Committee's statement, which acknowledges protection for those acting under the belief that a corporation existed. In this case, it is pivotal to ascertain whether Yarmouth was aware of J. R's dissolution. His prompt reestablishment of the corporation after learning of the dissolution may support his claim of lack of knowledge, yet there is insufficient evidence to verify his assertion of not receiving relevant correspondence from the State. Consequently, the summary judgment favoring Equipto and Draper Shade is reversed, and the case is remanded for further factual investigation. If Yarmouth is found not liable under RCW 23B.02.040, Equipto and Draper Shade must pursue the newly incorporated J. R for the debts of the dissolved corporation. The document notes that a dissolved corporation can still face lawsuits and implies the assets of the old J. R were likely transferred to the new J. R, which Yarmouth incorporated. The attorney for Yarmouth acknowledged that the new J. R would be accountable for the old debts. Precedent supports that a new corporation may inherit the liabilities of its predecessor if it is deemed a mere continuation.

Justice Alexander concurs with the majority's decision to reverse summary judgments against Jerry Yarmouth, emphasizing that the focus on remand should solely be Yarmouth's knowledge of J. R Interiors, Inc.'s dissolution. He disagrees with the majority's suggestion that if Yarmouth is found not liable, creditors should pursue the 'new' J. R for debts, arguing that this advice could incite further litigation and that the court should not extend beyond the liability issue at hand.

Justice Johnson dissents, arguing that the principal of an administratively dissolved corporation cannot claim legal protections, as statutes and case law dictate that no corporation means no immunity. He critiques the majority for misapplying a statutory section unrelated to the case facts, asserting that the individual should be held liable for a contract made on behalf of a non-existent corporation. Johnson stresses that corporate existence and protections are contingent upon adherence to statutory requirements, and since the corporation in question was dissolved without reinstatement, the majority's interpretation of the law is flawed. He references specific Washington statutes to support his position, indicating that liability arises when an individual acts on behalf of a corporation they know to be dissolved.

RCW 23B.02.040 provides a shield from personal liability when a corporation does not exist, but only if both parties are aware of this absence. In this case, there is no evidence that the plaintiffs knew there was no corporation at the time of the contract, rendering this section inapplicable. The case is resolved through the application of dissolution statutes, which outline the responsibilities of a corporation, including filing annual reports and paying a licensing fee. The defendant's corporation failed to meet these obligations for three years, leading to administrative dissolution by the Secretary of State. Following dissolution, a corporation may only conduct necessary business to wind up affairs, and while reinstatement is possible within two years, the corporation in this case did not exist at the time of the contract.

The defendant claims ignorance of the administrative dissolution, attributing this to a former registered agent, a defense the majority accepts, leading to a remand to determine if the defendant had actual knowledge of the dissolution. However, the neglect of statutory duties—such as failing to pay fees, file reports, or maintain a registered agent—indicates a disregard for corporate formalities. The statute places the burden on the corporation to notify the Secretary of State of changes, not on the registered agent, and a "good faith" defense for failing to meet these corporate duties is not legally recognized. Thus, since no corporation existed at the time of the contract, personal liability for the contracts is affirmed.

Affirmation of the Court of Appeals is warranted. J. R Interiors, Inc. was administratively dissolved in 1991, with summary judgment issued against Yarmouth personally in 1994. Relevant statutes during this period are referenced in the dissent. Incorporation, as defined by Black's Law Dictionary, is the process of forming a corporation, granting it perpetual existence unless limited. The statute in question applies to acts prior to the corporation's formation. A corporation is obligated to be aware of its registered agent's status, as outlined in RCW 23B.14.200(3) and (4). The loss of notice from the Secretary of State or changes in the registered agent's status do not alter the corporation’s existence post-administrative dissolution; knowledge or belief of the corporation's status is irrelevant. Additionally, the purchase of new equipment by the defendant is not deemed necessary to wind up business; only contracts necessary for winding up would shield an individual from personal liability, indicating potential liability in this case due to the nature of the acts performed.