## Facts

- Wayne and Dianne Morse built and operated a car wash in 1984, then agreed to sell it in 1985.
- Douglas M. Durbano and Kevin S. Garn, acting for a planned corporation to be named American Vending Services, Inc. (AVSI), executed the purchase contract with the Morses on July 10, 1985.
- At the time of contract execution, AVSI had not yet been incorporated; the articles of incorporation were executed August 1, 1985 and filed August 19, 1985.
- AVSI operated the car wash for several years, experienced financial difficulties, and failed to make required payments to the Morses.
- AVSI sued the Morses alleging fraudulent and negligent misrepresentation, breach of contract, and mutual mistake.
- The Morses sought to hold Durbano and Garn personally liable on the contract because the corporation did not exist when the contract was made.

## Issues

1. Whether, under Utah’s Business Corporation Act, AVSI could be treated as a de facto corporation for a contract executed before incorporation, thereby insulating Durbano and Garn from personal liability.
2. Whether corporation by estoppel barred the Morses from denying AVSI’s corporate existence and pursuing personal liability against Durbano and Garn.
3. Whether the evidence supported AVSI’s claims for fraudulent/negligent misrepresentation, breach of contract, and mutual mistake.
4. Whether the trial court’s attorney-fee rulings were erroneous.

## Decision

- The court reversed the determination that AVSI was a de facto corporation at the time of the July 10, 1985 contract.
- The court reversed the determination that corporation by estoppel prevented the Morses from seeking personal liability against Durbano and Garn.
- The court held Durbano and Garn personally liable for obligations arising from the preincorporation contract.
- The court affirmed the trial court’s rejection of AVSI’s claims for misrepresentation, breach of contract, and mutual mistake due to insufficient evidence.
- The court affirmed in part and reversed in part overall, with an amended opinion addressing attorney fees on appeal.

## Legal Principles

- Under Utah’s Business Corporation Act, corporate existence begins only upon issuance of the certificate of incorporation; preincorporation “de facto corporation” status is not recognized where inconsistent with the statutory scheme.
- Corporation by estoppel, if available, is limited and does not operate to create corporate existence contrary to statute or automatically shield individuals who knowingly contract before incorporation from personal liability.
- A person who purports to contract on behalf of a corporation that does not yet exist is personally liable on the contract absent an agreement clearly shifting liability away from the individual.
- Appellate review of factual findings on misrepresentation, contract breach, and mistake is deferential; findings supported by the record are upheld.

## Conclusion

Because AVSI was not legally incorporated when the car-wash contract was executed, Utah law did not permit treating it as a de facto corporation, and corporation by estoppel did not bar the sellers’ personal-liability claim; accordingly, the individuals who contracted before incorporation were personally liable, while AVSI’s affirmative claims against the sellers failed for lack of proof.


Am. Vending Servs., Inc. v. Morse, 881 P.2d 917 (Utah Ct. App. 1994)