In June
2004 AGF Spring Creek / Coit II, Ltd. leased office space in Richardson Texas
to Atrium Executive Business Centers Richardson, LLC
Later there were three Lease
Amendments. Each was signed by Curtis for the tenant, as its President or CEO.
The last Amendment extended the lease term into 2015.
Atrium, however, was never formed.
Instead, Curtis formed “AEBC-Richardson, Inc.” After formation, AEBC occupied
the leased premises and operated a business there for six years. Although AEBC
offered executive suites at the leased premises to subtenants, it was Atrium
that was shown as the tenant in the Lease and all Amendments, and Dawn Curtis
signed each on behalf of Atrium, not AEBC.
In March 2010 Curtis sent an email
to representatives of the Landlord stating that revenues were too low to
continue in operations, and asking AGF to handle the details of the pending
lease default. No further rent was paid and AGF terminated the Lease by written
notice issued later that month.
In April 2010 AGF initiated a
lawsuit against Dawn Curtis individually for breach of the 2004 Lease, as
extended and amended. AGF contended that although Atrium was the named tenant,
in fact (and in law) Atrium never existed as it was never formed. And
consequently, Dawn Curtis was 100% liable as if she had signed an unconditional
Guaranty.
The jury entered a verdict in favor
of AGF in trial court, and the judge converted it into a Judgment. Curtis
appealed.
On appeal Curtis acknowledged her
mistake in failing to change the name of the tenant on the Lease, and her
further mistakes in signing the Lease Amendments as President of an LLC that
did not exist. She requested however that the Court overlook these mistakes and
instead impose a lease agreement between AGF and AEBC through the action and
conduct of the parties.
To support her argument, Curtis
provided evidence that reimbursement of the tenant’s move-in expenses, all
rental payments, fax transmissions, insurance policies, sales and use tax
permits and subtenancy agreements with executive suite customers were all made
in the name of AEBC rather than Atrium, and further – that Landlord was aware
of these documents and payments.
However, Landlord refuted those
arguments by stating that the Lease was unambiguous. Atrium Executive Business
Centers Richardson, LLC was identified as the Tenant. Not AEBC-Richardson, Inc.
The Lease also contained an “incorporation” clause providing that the Lease
could not be altered, waived, amended or extended unless by written agreement.
Obviously changing the identity of
one of the parties to the Lease is serious business and not easily accomplished
without a written agreement between both parties.
Curtis’ lawyers found an interesting
case from Fort Worth. An Appeals Court decided in 1997 that, in a similar
situation as this case, “a promoter is relieved of personal liability only when
the corporation subsequently adopts the contract either expressly or by
accepting its benefits.”
But in our case the entity was never
formed, and could not “subsequently adopt” the Lease. AEBC was ultimately
formed. Not Atrium. And if Landlord had sued AEBC for breach of Lease, AEBC
could have easily defended claiming it never signed the Lease or any of the
modifications or anything else (such as a Lease Guaranty) leading to imposition
of liability against AEBC.
Ultimately the Appeals Court
overturned the lower court’s judgment, but due to entirely other issues: the
jury had miscalculated the proper amount of the award. So while I must
truthfully tell you that Curtis won this round, I must also conclude that if
this case isn’t settled but instead is retried, Curtis will surely lose again.
See Curtis v. AGF Spring Creek / Coit II, Ltd.;
No. 15-12-00429-CV; Texas 14th Court of Appeals, August 28, 2013.
Lessons
learned:
1. Dawn
Curtis made the cardinal mistake of signing an important legal document on
behalf of an entity before the entity was formed. I see this problem daily. Ok
daily is an exaggeration, but I see it
very often.
2. If
a document is signed for a non-existent entity, personal liability is typically
imposed upon the person signing. There is a way to finesse this when you know
the entity has not yet been formed. Write in a special provision eliminating
all personal liability once the entity has been formed and evidence of
formation and adoption by the new entity is sent to the other parties who have
signed the contract.
3. Practice
Tip: When I encounter an entity (whether as a client, adverse party,
service provider, vendor, etc.) I check to be sure it is formed in its state of
organization, and qualified to do business in Texas. Typically I start here.
It’s a free search: https://ourcpa.cpa.state.tx.us/coa/Index.html.
Then if it will be a client or adverse party, I’ll dig further, but be prepared
to pay $1 per search: https://direct.sos.state.tx.us/acct/acct-login.asp.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
