One of the main reasons small business owners decide to incorporate is to limit personal liability for business debts. Lawyers usually advise clients to do certain things to maintain limited liability. Those things are not difficult, but they must be done properly. The typical advice is to open a separate bank account, enact and follow corporate bylaws, hold regular board and shareholder meetings, keep a stock ledger and observe general corporate formalities.
This is all great advice, but sometimes lawyers forget to advise their clients regarding the simplest things: how to properly execute legal documents on behalf of the corporation. A recent opinion by the Tennessee Court of Appeals serves as a great reminder to business owners on just how important the proper execution of legal documents can be.
Mudd v. Goostree involves a fairly standard commercial lease in which Mudd Properties is identified as the “landlord” and (ostensibly) Liberty Cabinets & Millworks Inc. (Liberty) is identified as the “tenant” in the body of the lease. In the signature block, Rexford Goodtree, the primary shareholder of Liberty, signed (italics where handwritten) as follows:
REX GOOSTREE, JR.
By Rex Goostree, Jr.
After Liberty got behind on its rent, the landlord filed suit against Liberty and Mr. Goostree. Mr. Goostree argued that he should not be held personally liable because his company, rather than him individually, was named as the tenant in the body of the lease. The court was unpersuaded and held that by signing his name individually and not as “president,” or whatever corporate title he held in Liberty, it was a “clear and unambiguous designation of Mr. Goostree as the tenant on the lease agreement.”
It is extremely important with commercial leases, or any other legal document, to always make it clear that the contracting party is the corporate entity–not the individual. Corporate officers should always list their corporate title adjacent to or below their name when acting in their official corporate capacity. It is clear from this case and many others that courts will not bail you out of a simple mistake unless intent is crystal clear.