Competency And Capacity Of Parties

Kirt Lyle was President, Secretary and Chief Financial Officer of Flightways Manufacturing, Inc., a corporation. Lyle entered into a two-year lease for a beach house at Malibu--on behalf of Fightways as the tenant. The lease agreement was signed by Lyle as President of Flightways. A deposit check for $11,000 was drawn against a Flightways corporate account. The lease was negotiated by a leasing agent, and the owner/lessor, Robert Snukal, never met Lyle.





Lyle moved in and paid rent with checks against his personal account, as well as checks against a Flightways corporate account. When rent payments stopped Snukal filed suit against Flightways for breach of contract. By this time Lyle was out at Flightways, replaced by someone who claimed Lyle wasn't authorized to enter into the lease on behalf of the corporation.





The trial court awarded judgment in favor of Snukal against Flightways for $22,300, plus attorney fees and costs of $12,935.





Flightways appealed on the issue of whether the signature of a corporate president, standing alone, is sufficient to bind a corporation under California Corporations Code section 313. In pertinent part, section 313 provides:





"...any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance or other instrument in writing...executed or entered into between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assist ant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same." (Note: the source of this statute is the Pennsylvania Business Corporation Law, section 305.)





After an intermediate court of appeal affirmed, the District Court of Appeal reversed--holding that under section 313 two signatures are required to enable third parties to rely on "the assertive authority of various senior executive officers of the corporation concerning the execution of any instrument on behalf of the corporation." (Citation omitted.)





In reaching this decision, the Court of Appeal said,





"The statute is not a model of drafting.... (U)nder the plain meaning of section 313, it is arguable the signature of either the chairman of the board or the president is sufficient to bind the corpora- tion, and that it is the other officers enumerated in the statute who must sign in the specified combi- nations to bind the corporation."





But the justices were swayed by "two leading treatises" (Marsh's California Corporations Law and Ballantine & Sterling) to hold that the legislative intent was to require signatures of two officers.





In a footnote the Court also said, "Although Lyle also served as chief financial officer and secretary of Flightways, he signed the lease solely in his capacity as president. Therefore, it is unnecessary to address whether section 313's requirement of two signatures calls for the signature of two discrete individuals, or whether one individual who holds more than one office can provide the requisite two signatures."





When this decision was originally released last December it brought heartburn to attorneys doing corporate and transactional work. They raised the point that corporate contracts are commonly signed by one officer--and are binding and enforceable if backed by a corporate resolution, or if authority to act can be supported by the doctrine of ostensible authority.





So the Court of Appeal vacated the decision, held another hearing or two, and on May ll re-issued the decision with this added language:





"We emphasize our holding is limited to an interpretation of section 313. This statute provides one basis for validating a corporate document. However, section 313 is not the exclusive means of establishing whether a corporate signatory or signatories bind a corporation. Nothing in our opinion is intended to affect in any way other validating concepts or means of proving the actual, apparent or ostensible authority of a corporate signatory."



By Bert Rush