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Published Articles by David Balovich
| Title: |
CALIFORNIA
CORPORATION 2 SIGNATURE LAW |
| Published in: |
Creditworthy
News |
| Date: |
9/10/98 |
If you are a frequent visitor to Creditworthy "Discussion Room" you are
aware of a flurry of activity in the "Credit" section concerning a recent
California district courts ruling concerning signatures on corporate documents.
I have been a party to the discussion covering this subject and have received requests to
research and comment. The following is what I have discovered.
The Law
There is a law that deals with the subject of 2 signatures on corporate documents. It is
not new but enacted in 1977 by the California Legislature. It is section 313 of the
California Corporations Code and covers "notes, mortgages, evidence of indebtedness,
contracts, share certificates, conveyances and any other written agreements or
contracts".
Without getting legal it states that the signature of the chairman or president is
sufficient to bind the corporation but other officer signatures such as secretary,
treasurer, vice president, etc., must have another officers signature accompany it to bind
the corporation.
The Current Case
Kirt Lyle was President, Secretary and Chief Financial Officer of Flightways Manufacturing
Inc., when he entered into an agreement to lease a Malibu beach house from Robert Snukal.
The agreement was drawn up between Flightways and Snukal and Lyle signed on behalf of
Flightways as its president.
Subsequently Lyle defaulted on the agreement and vacated the property. Snukal properly
noticed both Lyle and Flightways and sued for breach of contract. Flightways countersued
stating Lyle did not have authority to bind the corporation. They argued that the
agreement was for personal not corporate use and that Lyle was not acting on behalf of the
corporation when he signed the lease agreement. The municipal court found in favor of
Snukal and awarded judgement of 22K and attorney fees and costs of 13K.
Flightways then filed with the appellate department of the superior court to have the
judgement overturned based on section 313 of the California Corporations Code that Lyle
did not have authority to bind the corporation for this debt and that Snukels' agent
failed to obtain two signatures on the agreement. The superior court upheld the lower
courts decision asserting that the corporation by giving Lyle the title of not only
president but also secretary and chief financial officer in effect allowed for two
signatures of corporate officers even though they were the same individual.
Flightways then requested that the superior court forward the case to the Court of Appelas
for further review.
The function of the Court of Appeals is not for the benefit of the party who lost in the
superior court, but to settle disagreements that arise during trial relating to questions
of law.
The sole issue the appeals court considered was whether the signature of a corporate
president, by itself, is sufficient to bind a corporation pursuant to section 313.
The appeals court in acknowledging that the president or chairman of the boards signature
was sufficient to bind the corporation also considered the legislatures purpose of
drafting section 313. The court interpreted the purpose of section 313 being to
"protect a corporation from the mischief of a single rogue officer". The court
of appeals wrote, "if our interpretation of section 313 is not what the Legislature
intended, the statute should be clarified."
The court of appeals said that although the signature of Lyle was binding as stated in
section 313 it agreed with the position of Flightways that Lyle was not acting in the
interest of the corporation and that the agreement entered into was for personal use on
the part of Lyle. The court went on to say that Lyle's signing the lease solely in his
capacity as president of Flightways was inadequate to bind the corporation pursuant to
section 313.
The lower courts decision was reversed and the matter sent back to the appellate
department of the superior court for further proceedings consistent with the opinion of
the district court of appeals.
Summary
The ruling by the Second District Court of Appeals may now be considered law only in that
district (the greater Los Angeles area) until and if the State Supreme Court rules on it
(if it is appealed).
There are five other district courts in California who are free to decide this issue as
they interpret the legislatures purpose up until the State Supreme Court makes a ruling.
Section 313 does not mention credit applications. It discusses contracts.
The action you decide to take in this matter should be discussed with your attorney.
However, be reminded this statute has been in existence for 21 years.
The California law firm I consulted with (they have offices in every major city in the
state) practices corporate law and was of the opinion that contracts either contain two
officers signatures or that a board resolution be obtained.
There have been several comments concerning the difficulty in obtaining board resolutions.
My personal experience has been quite the opposite and as matter of procedure we obtain
them daily on behalf of our clients with no opposition.
Finally, credit applications are defined in Regulation B of the Equal Credit Opportunity
Act as a "written or verbal request for credit". The credit application is not
considered to be a legal document nor is it a contract. There is no statutory requirement
that a credit application be signed.I wish you well. |
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