WHO IS ON THE HOOK, YOU OR YOUR COMPANY?

Date: April 13th, 2010

On April 12, 2010, Washington’s Court of Appeals (Division I) handed down an opinion that should be an important lesson for all business owners. If the party entering into a transaction is an entity, and not the entity’s owners, then the contract language, not just the signature blocks, had better make that fact absolutely clear.

In William and Teresa Grover v. Losh Family, LLC, the Court of Appeals found William and Teresa Grover personally liable for a lease default they claimed was the responsibility of their wholly owned limited liability company. Presumably the Grovers formed their LLC precisely to avoid personal liability. So, why didn’t they get what they bargained for?

In November 2005, the Grovers formed Grover International, LLC. One month later, through the LLC, the Grovers purchased a business whose operations included a leased warehouse. The seller arranged for the lease to be assigned as part of the deal, and this is where it gets interesting. The lease assignment document purported to assign the lease to “William and Teresa Grover as individuals, dba Grover International, LLC.” William Grover signed the lease assignment as, “Grover International, LLC by William Grover, member.”

In March 2006, the LLC sold its business and all its assets to a new buyer who also assumed the warehouse lease. Seven months later, the new owners of the business defaulted on the lease and the landlord sued all of the tenants under the lease. Ultimately, the trial court found all of the tenants, including William and Teresa Grover, jointly and severally liable on the lease. The Grovers appealed, arguing that because they signed using an “entity signature”, they had no personal liability. The Court of Appeals disagreed.

Now, here comes the lesson. The Court found that the 2005 lease assignment referred five different times to, “William and Teresa Grover as individuals, dba Grover International, LLC.” The Court was not moved by the fact that Mr. Grover signed the lease assignment as, “Grover International, LLC by William Grover, member.” In the Court’s words, “[i]f Grover did not want to be personally bound on the Assignment, he should have insisted on the elimination of the language within the agreement that designated the assignee as “William and Teresa Grover as individuals.” In making this decision, the Court cited a long established principle in Washington law that where an agreement contains language binding the individual signer, additional descriptive language added to the signature does not alter the signer’s personal obligation.

Two important lessons spring from this case. First, and most importantly, a corporate signature block will not shield business owners from liability if the body of the agreement refers to the individual business owners as the contracting parties. The solution here is to read contracts carefully and if you don’t intend to be personally liable, insist on the elimination of any language in the body of the contract that even remotely hints toward personal liability.

Next, do not misuse or misunderstand the term, “dba” or “d/b/a”, which is an abbreviation for “doing business as.” Such language is typically used to denote when a person or entity is doing business through a different trade name or fictitious name. A trade name or fictitious name is simply a business name that is different than your personal name, the names of your partners or the officially registered name of your LLC, limited partnership or corporation. For example, if the Acme Corporation is actually known to the public as the “The World’s Best Cakes,” then it could refer to itself as Acme Corporation, doing business as “The World’s Best Cakes.” Notice that the name by which Acme Corporation is known is not the name of the legal entity, but simply the business name facing the business’ customers. (Note: In Washington, trade names need to be registered with the Department of Licensing. Click here to learn more.) In the Grover case, the lease assignment document incorrectly referred to the Grovers as the contracting party, and then incorrectly described them as “dba” Grover International, LLC. The legal name of the business is not a trade name or fictitious name. In the end, this mistake was not particularly material to the Court’s decision because it had already determined William and Teresa were personally obligated under the lease based on the contract language. Nevertheless, it is important to understand the proper distinction between the legal name of an entity and a trade name.

Business owners form their companies to avoid personal liability for the debts and obligations of the business. However, as the Grover case shows, the shield can be lost if proper attention is not paid to the language in contracts. If you don’t want to be personally liable on a contract, read it to make sure the language clearly makes the company, and not you, responsible. Don’t assume a signature block referencing your company will be enough to make only the company responsible. Finally, always have company counsel review contracts before you sign them. After all, what is the point of having a corporation, LLC or limited partnership if sloppy contracting practices will leave you on the hook?