Corporate – Promoter – Contract – Tort/Negligence – First Impression

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Hansen v. Fields Co. (Lawyers Weekly No. 010-097-14, 8 pp.) (Kaye Hearn, J.) Appealed from Charleston County Circuit Court (Kristi Harrington, J.) S.C. S. Ct.

Holding: Since the defendant-LLC never ratified any of its promoter’s preformation contracts, the LLC is not liable for any breach of those contracts; moreover, we adopt the majority rule that a corporation is not liable in tort for the preformation acts of its promoter.

The trial court should have granted the LLC’s motion for a directed verdict on all of plaintiff’s claims. We reverse judgment for plaintiff.

Plaintiff sought Robert Fields’ help in securing financing to buy a water bottling company. Ultimately, Fields participated in the formation of the appellant-limited liability company, which participated in the purchase of the water bottling company, cutting plaintiff out of the deal.

Plaintiff sued, and a jury found appellant liable for breach of fiduciary duty, breach of contract, breach of contract accompanied by a fraudulent act, misrepresentation, conversion, and interference with prospective contractual relations. During the damages phase of trial, plaintiff elected to proceed on his claim for interference with prospective contractual relations. The jury awarded him $1,189,408, which the trial court reduced by $130,000, which plaintiff had received in settlement of claims against other defendants.

Appellant appeals the denial of its motion for a directed verdict on all of plaintiff’s claims. The parties do not dispute that appellant did not breach any contract with plaintiff, nor did it act tortiously towards him. Rather, plaintiff’s theory of the case depends on appellant being liable for its promoters’— specifically Fields’ and his related entities’—acts.

The first step in resolving this case is determining if and when a limited liability company can be held liable for its promoter’s preformation contracts or torts, issues of first impression in South Carolina.

Turning first to a corporate entity’s liability for preformation contracts, we adopt the prevailing rule that, “because a corporation cannot have agents, contract for itself, or be contracted with prior to its incorporation, it is not liable on any contracts that a promoter makes for its benefit prior to incorporation unless it assumes the obligation by its own act after incorporation….” 18 Am. Jur. 2d Corporations § 123 (2014).

While initially not liable for a promoter’s contracts, a corporation may become liable for a promoter’s preformation contract either through expressly ratifying the contract or through implicitly ratifying it by accepting its benefits with full knowledge of its terms. Here, the directed verdict should have been granted as to plaintiff’s contract claims because he failed to present any evidence from which a jury could find that appellant ratified any contract with plaintiff. There was no evidence that appellant expressly ratified any preformation contract. There also was no evidence to show that appellant benefited from or accepted any benefits of Fields’ or his related entities’ contracts with plaintiff.

Turning to plaintiff’s tort claims, for the preformation torts of a corporate entity’s promoter, the rule among those jurisdictions that have considered the issue is that a corporation is not liable for torts that its promoters committed before it came into existence. For several public policy reasons (first, there is no agency relationship between a promoter and a non-existent corporate entity; second, the individual tortfeasor—the promoter—is still liable for any tort he committed, so the injured party is not denied recourse for the wrong suffered; and third, a contrary rule would permit innocent investors to be financially harmed due to tortious conduct they neither aided nor were aware of), we adopt the rule that a corporation is not liable in tort for the preformation acts of its promoter.

Reversed.