Jack Stauber 1

BLAW 308-4575

April 19, 2022

Ch. 42 Case Briefs

1. SmithStearn Yachts, Inc. v. Gyrographic Comm., Inc.

Issue: Can Leathern Stearn perform contracts on behalf of a non incorporated entity,

SmithStearn, LLC, even though the entity does not yet exist?

Rule: “A corporation is generally not bound by contracts entered into on its behalf prior to its

existence, unless the corporation adopted, accepted, or ratified a preincorporated contract,

resulting in corporate liability on the contract”. “A corporation impliedly adopts a

preincorporated contract when it accepts the benefits of the contract and renders performance in

accordance therewith”.

Application: SmithStearn Yachts, Inc, a Delaware corporation providing luxury yachting

services in Connecticut, agreed to a contract with Gyrographic Communications, Inc., a

California company, by which Gyrographic would provide advertising, marketing, and

promotional services to SmithStearn. When SmithStearn sued Gyrographic for breaching the

contract, Gyrographic countered that SmithStearn was not a party to the contract because the

contract was purportedly made with a limited liability company, SmithStearn Yachts LLC, not

the corporation that was suing Gyrographic. Leathern Stearn, the purported promoter and

president of Smith-Stearn Yachts, Inc., executed the agreement with Gyrographic on behalf of

SmithStearn, LLC, an entity that never came into existence. Rather, the plaintiff, SmithStearn

Yachts, Inc., was formed. As a result, SmithStearn Yachts, Inc. contends that it has standing to

bring this action because it assumed and ratified, both explicitly and implicitly, the agreement

that was made on its behalf, prior to its formation.

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Generally, a corporation is not bound by contracts entered into on its behalf prior to its

existence. Although promoters are not agents of the proposed corporation or its investors, a

promoter owes a fiduciary duty to the corporation and to its prospective investors. A promoter

owes such parties a duty of full disclosure and honesty by not breaching his duty of care by

diverting money received from prospective shareholders to pay his expenses, or commit a

conflict of interest by transacting in a personal capacity with the corporation or negatively hurt

the corporation's business. Instead of using automatic novation clauses, today most well-advised

promoters incorporate the business prior to making any contracts for the corporation. That is, the

well-advised promoter makes no pre-incorporation contracts. Instead, they only make contracts

for existing corporations.

As a result, only the corporation and the third party and not the promoter have liability on

the contract. A corporation can, however, acquire rights and subject itself to duties with respect

to preincorporation matters. A contract made in the name of an inchoate corporation can be

enforced after the corporation is organized on the principle of ratification. Ratification is defined

as the affirmation by a person of a prior act which did not bind him but which was done or

professedly done on his account. Ratification requires acceptance of the results of the act with an

intent to ratify, and with full knowledge of all the material circumstances. A corporation may

after its organization become liable on preliminary contracts either through the Doctrine of

Estoppel which is when people hold themselves out as representing a corporation or believe

themselves to be dealing with a corporation, in which case if a third party follows through with a

contractual agreement on that assumption, then a court can estop the individuals from denying

the existence of a corporation. Along with the fact that agreements made by its promoters can be
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expressly adopted or ratified by the organization or when they receive benefits from the

agreement.

Although SmithStearn Yachts, Inc. was formed after the execution of the agreement, it

received the benefit of the services pursuant to the agreement. Gyrographic worked toward

developing letterheads, business cards, and other marketing material for SmithStearnYachts, Inc.

SmithStearn Yachts, Inc. made payments to Gyrographic, which SmithStearn Yachts, Inc. then

recorded in its books. Thus, SmithStearn Yachts, Inc. received the benefits of the agreement and

also fulfilled the obligations under it, thereby ratifying the agreement. Furthermore, ratification,

adoption, or acceptance of a preincorporation contract by a promoter need not be expressed, but

may be implied from acts or acquiescence on the part of the corporation or its authorized agents.

Thus, a corporation’s act of suing on a preincorporated contract is in itself an adoption of the

contract. SmithStearn Yachts, Inc. implicitly ratified the agreement when it brought this action.

By suing under the agreement, SmithStearn Yachts, Inc. is also assuming the liabilities under it,

thereby enforcing and adopting the agreement.

Conclusion: As a result, the Court denied the defendants motion to dismiss and ruled in favor of

SmithStearn Yachts, Inc.

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2. Krupinski v. Deyesso

Issue: Would Deyesso, as a corporate promoter, be held liable for contractual agreements that

were made on behalf of a preincorporated entity even after Scharnhorst assumed responsibility

for the employment agreement?

Rule: Under the MBCA, “A [promoter] who is acting on behalf of a business prior to its

incorporation may be jointly and severally liable for all liabilities created while acting on behalf

of the preincorporated entity unless the promoter has made some effort to incorporate the

business and can escape liability either through third party agreement or through an automatic

novation clause once the business has been incorporated”. “A preincorporation contract may be

adopted, accepted, or ratified by a corporation when properly organized, resulting in corporate

liability on the contract”. “A corporation impliedly adopts a preincorporated contract when it

accepts the benefits of the contract and renders performance in accordance therewith”.

Application: In February 1995, Ronald Krupinski met with Frank Viola and William Deyesso to

discuss investing in an adult entertainment club, to be named “Centerfolds,” in Providence,

Rhode Island. At the meeting, Krupinski claims it was agreed that he was to receive a 33 percent

ownership interest in Centerfolds, and when the club opened, he would work as a manager and

earn a salary of $52,000 annually plus bonuses. In May 1995, Viola purchased Scharnhorst as the

operating entity for Centerfolds. Viola, Deyesso, and others became officers and shareholders of

Scharnhorst in December 1995 through appropriate corporate action.Following the purchase,

Krupinski began preparing the club for its opening, which officially occurred in February 1996.

Due to an issue with the adult entertainment license, the club was forced to close shortly after

opening. As a result of Centerfold’s temporary forced closure, Krupinski agreed to reduce his

ownership interest in the club to 25 percent.Krupinski again served as a manager of the club
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when it reopened in August 1996. Krupinski served in that capacity until July 1997, when he

claims he was terminated without cause and without justification. Krupinski did not have a

written employment agreement during his tenure as manager.

Deyesso claims Krupinski was terminated due to his participation in a purported

credit-card scam through the altering of customer receipts, improper conduct with the club’s

employees, and excessive drinking. The site where Providence Centerfolds operated was taken

by eminent domain in 2001. Once Centerfolds closed and Deyesso failed to timely locate a new

building, Deyesso proceeded to open other clubs in Massachusetts under the name Centerfolds,

using some of the tangible property from the Providence club. Krupinski alleges that Deyesso

breached the original agreement with him by excluding him from participating in those new,

additional clubs. On October 7, 2005, Scharnhorst’s corporate charter was revoked by the Rhode

Island Secretary of State due to its failure to file its Annual Report for the year 2005. Krupinski’s

original complaint was filed on July 10, 2007, and the current, operative complaint was filed on

February 8, 2012. On April 12, 2012, the court issued a decision dismissing Counts II through

VIII of the complaint. Accordingly, the only remaining cause of action in this matter—which is

now the subject of defendant’s summary judgment motion—is Count I, setting forth a claim for

breach of contract brought individually against Deyesso.

Deyesso argues that he was acting on behalf of Scharnhorst in his capacity as director

when he terminated Krupinski’s employment and is thus not personally liable. To that end,

Deyesso maintains that Krupinski’s employment agreement as a claimed preincorporation

contract subsequently became the obligation of Scharnhorst when the corporation was purchased

and under the MBCA “Adoption of a preincorporation contract results in corporate liability on

the contract”. Scharnhorst, according to Deyesso, ratified the employment agreement at the
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agreed upon salary of $52,000 per year. Krupinski, in response, contends that the oral agreement

was entered into with Deyesso personally. Moreover, Krupinski argues that any assumption of

the agreement by Scharnhorst does not automatically relieve Deyesso of any personal liability.

Essentially, to prevail on summary judgment, Deyesso must prove that he was excused from any

and all liability when Scharnhorst assumed the employment agreement.

There can be no dispute that an oral agreement was made between Deyesso, Viola, and

Krupinski, and that, under the terms of the agreement, Krupinski was to serve as a manager of

the club. Additionally, there can be no dispute that Krupinski received compensation from

Scharnhorst for services provided in accordance with the terms of the agreement. Thus, there can

be no dispute that Scharnhorst accepted the benefits of the contract and thereby adopted it. And

according to the MBCA “A preincorporation contract may be adopted, accepted, or ratified by a

corporation when properly organized, resulting in corporate liability on the contract.” In addition

“A corporation impliedly adopts a preincorporation contract when it accepts the benefits of the

contract and renders performance in accordance therewith.” In support of his Motion for

Summary Judgment, Deyesso now urges the Court to find that he made the contract as

Scharnhorst’s promoter, and that he was to be released from liability upon adoption thereof.

The term “promoter” has been defined in case law as “every person acting, by whatever

name, in the forming and establishing of a company at any period prior to the company

becoming fully incorporated”. This definition is consistent with the principle that “a corporation

should have a full and complete organization and existence as an entity before it can enter into

any kind of a contract”. As a result, it can be said that a promoter is an individual who makes a

contract on behalf of an entity that lacks the capacity to enter into the transaction. Because

Deyesso did not make a contract on behalf of Scharnhorst prior to the company becoming fully
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incorporated, under Gerffert and Ireland, he may not be considered a corporate promoter and as

such may be estopped from denying the contractual agreement and be held liable under the

doctrine of Estoppel.

However, according to the Supreme Court of Ohio, the legal principles governing the

relationship between a corporation and its promoters are not based upon the principles

enunciated in Ireland, but are instead “derived from the law of agency”. Because a corporation

may not have agents prior to becoming fully incorporated, as mentioned in Rees v. Mosaic

Techs., Inc., a finding that a contract was made on behalf of an entity lacking legal capacity to

make contracts is not a condition precedent to a determination that the individual who made the

contract was acting as a corporate promoter. For purposes of the instant dispute, this Court is not

required to ascertain the nature of the rules governing Deyesso’s claim. Instead, the Court finds

that the motion for summary judgment may be resolved on the basis that “whether a person is

actually a promoter is a question of fact to be determined by the trier of fact”.

For the foregoing reasons, Deyesso’s Motion for Summary Judgment is denied with

respect to the breach of contract allegations stemming from Krupinski’s signing of the

promissory note and his termination as manager because resolution of such issues are [sic]

factual in nature and improper for the Court to determine on summary judgment.

Conclusion: Defendant’s motion for summary judgment denied with respect to the breach of

contract allegations and as such the court rules in favor of the plaintiff.