MOST BUSINESS operators treat advice from lawyers like advice from their grandmothers:
Well meaning, perhaps, but overly protective and oblivious to the practical demands of the real world. Occasionally, however, a court comes out with an opinion that lets us lawyers show you that sometimes bad things can happen to people who don’t listen to their lawyers’ advice.
The opinion in question comes from Connecticut, in the case of Rund v. Melillo, 772 A.2d 774 (Conn. App. 2001). Mr. Melillo had a general construction business known as “Michael’s Restorations Inc.,” which apparently was a corporation in good standing. He entered a subcontract with Mr. Rund’s firm, “Professional Ventures Inc.” When Professional Ventures was not paid in full for its work on a project (after the evidence showed that Michael’s Restorations had been paid by the owner), Rund and Professional Ventures sued both Michael’s Restorations and Melillo, personally.
No good argument was given as to why Michael’s Restorations shouldn’t be liable, so a judgment was entered against it, but Melillo strongly objected to the court holding him personally liable. The court of appeals agreed that Melillo should be personally liable.
Why? Because of the way the contract was drafted. It seems that Melillo prepared the contract to say that it was between “Michael’s Restorations Inc., Michael Melillo and Professional Ventures Inc., William Rund.” Below the signature lines were the words “Michael’s Restorations Inc./Michael Melillo” and “Professional Ventures Inc./William Rund.”
The court found that the words could be construed either way – to require personal liability or not. Because Rund (of course) testified that he understood that Melillo was intending to be personally liable, and because Melillo prepared the contract, the court was entitled to give Rund the benefit of the doubt.
The case would have come out differently had Melillo been a little more careful with his words. If you are incorporated, it is essential that anyone signing papers on behalf of the corporation designate his representative capacity, be it “president,” “comptroller,” “project manager” or “sales representative.”
If the company is not incorporated, adding the word “agent” after your name is another way to let the other party know that you are not intending to be personally liable (although this doesn’t guarantee that there won’t be personal liability for other reasons). One of the main benefits from spending the time and money to incorporate is lost if you don’t observe the corporate formalities at all times.
This extends to nearly all levels of employees and all pieces of paper: contracts, purchase orders, stationery, business cards, checks, name and address on e-mails, Web sites, etc. Even if it means throwing out whole boxes of new letterhead, it is still a better use of money than paying lawyers to avoid having your personal bank account garnished for a corporate debt.
This is not to say that there are not circumstances in which you can be personally liable, no matter how carefully you sign documents. There is a concept in law called “piercing the corporate veil,” which allows a court to do this if all necessary corporate formalities are not maintained, of which signing documents correctly is just one. Individuals can bring on personal liability by making independent representations or taking actions “outside the scope of their authority.” All this was probably explained to them when they met with their attorneys to go over their incorporation papers but, like Mr. Melillo, they probably weren’t listening.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., phone 816/421-4800, e-mail to [email protected]