The personal liability of officers who sign corporate checks.

THE PERSONAL LIABILITY OF OFFICERS WHO SIGN CORPORATE CHECKS

A check is the most common type of commercial paper in circulation today. A large number of checks are issued by corporations. These invariably bear the signature of an office authorized to sign on behalf of the firm. Frequently,

the officer signs without realizing that he or she may be assuming a personal liability on the instrument--if, for example, the corporation should default. Small business owner/operators and their employees should be aware of the risk of personal liability when signing the firm's checks. The cases described below illustrate the dangers of signing a check without clearly indicating one's capacity as a corporate representative when doing so.

A CASE EXAMPLE

In 1979, Frederick J. Dowie, president and sole stockholder of Fred Dowie Enterprises, Inc., ordered 325,000 hot-dog buns from the Colonial Baking Company. Payment was made by corporate check. The check, for $28,000, showed the name, address, and bank account number of the company. It also bore, on the signature line in the lower right, the cursive signature "Frederick J. Dowie." Only three hundred of the buns were sold by the company. Following a dispute over the ownership and responsibility for the remaining buns, payment was stopped on the check. Colonial brought suit not only against Dowie's company but also against Dowie himself, based on the fact that he signed the check. Dowie argued that he had signed merely as authorized representative of the corporation. In support of this argument, Dowie pointed out that the instrument was clearly marked as a corporate check, bearing the name and address of the firm. Certainly, said Dowie, the signing officer of a corporation should not be held liable in such a situation. The Supreme Court of the state of Iowa disagreed. Dowie was held personally liable for the $28,000.

Why was Dowie held liable on this instrument? Because Dowie, like many executives, failed to sign this check in the proper manner.

THE STATUTORY AUTHORITY

The Uniform Commercial Code (the Code), applicable in all states, indicates that a person who signs his own name to an instrument "except as otherwise established between the immediate parties, is personally obligated if the instrument names the person represented but does not show that the representative signed in a representative capacity ...."

The Iowa case cited above is a typical one, in which the corporate name appears on the check, and the officer's signature appears in the lower right, on the signature line. While officers may feel that any reasonable person should recognize such a signature as representative of a corporate obligation only, the courts have not so ruled. Most courts feel that in such a circumstance the officer has signed the instrument in an ambiguous fashion by naming the person represented (the corporation), but without clearly indicating his or her official representative capacity only. Accordingly, the officer will be presumed to be personally liable, unless it can be proven that the person receiving the check clearly understood that the corporation only, and not the signing officer, was to be liable.

An examination of recent cases reveals that, more often than not, officers have been unable to rebut the presumption of liability, and were therefore required to pay on the instrument. A finding in favor of the payee (the creditor) might be described as the "norm," and the Iowa case described above is typical. There are, however, a few cases in which the officer was able to convince the court that no personal liability was intended. For example, in Highfield v. Lang, the payee was an employee of the firm which issued the check. As an employee, he knew that the firm was incorporated. He also knew that the check bore two signatures, one individual being a vice-president and the other a bookkeeper of the firm. On the whole, therefore, the court agreed that the evidence suggested that the payee "knew all the various signers of the checks were authorized corporate representatives; and that no personal liability on their part was intended.

St. Croix Engineering Corp. v. McLay is another case in which the officer was able to avoid personal liability. Unlike the previous case, the payee here was not an employee of the firm, but rather a general creditor. The court's ruling in favor of the officer was based upon three findings of fact: first, the creditor (payee) had originally made out the invoices in the name of the corporation (not the officer); second, in the creditor's demand letter the corporation (not the officer) was listed as the debtor; and third, the creditor first brought suit against the corporation, not the officer. All of these events suggested to the court that the payee never intended to hold the officer personally liable.

These two cases illustrate that the officer may be able to convince the court that the person who received the check never had any intention of holding him personally liable on the instrument. Yet even under these circumstances, there is the danger that the check might be endorsed over to a third party. The Code states that if a third party should acquire the instrument, the person who signs an instrument without indicating his agency status is absolutely liable on it. Evidence tending to negate this liability is not admissible. It is clearly dangerous, therefore, to sign an instrument in an ambiguous fashion, even if the original payee is aware of the representative capacity of the signer.

THE PHYSICAL CONFIGURATION

OF THE CHECK

The cases cited in the preceding paragraphs involved checks which bore the name and address of the corporation in the upper left corner, and the signature of the officer in the lower right. It has been observed that such a signature may be ambiguous, and the personal liability of the officer presumed. But what if the name of the corporation appears in two places on the instrument? It might be argued that in such a case the personal liability of the officer is clearly negated. The courts, however, have not so held.

One of the most frequently cited cases in this regard is Griffin v. Ellinger. In that case, a check bore the name and address of the Greenway Building Co., Inc. in the upper left, and in addition, the name "Greenway Building, Inc." stamped by machine on the line marked "Dollars." When the officer was sued in his personal capacity, he argued that the instrument clearly indicated his representative capacity. Not so, said the Supreme Court of Texas. That court affirmed a trial court's factual determination that the officer who signed the check had not been able to satisfactorily disprove his liability. The court rejected the officer's argument that a check signed in such a fashion is free from ambiguity as a matter of law. Essentially, the Texas Supreme Court held that the officer's liability was a question of fact to be decided by the trial court. The fact that the creditor (the payee) had previously received checks from the corporation signed by different officers, and the creditor's invoices had originally named the corporation (rather than the officer) as the debtor, was not sufficient to show as a matter of law that the officer was not intended to be held liable.

The Texas Supreme Court therefore affirmed the lower court judgment in favor of the creditor, holding the officer personally liable in the amount of $3,950.

In the above case the corporate name appeared in the upper left as well as on the dollar amount line. A more common configuration is for the corporate name to appear in the upper left, and again in the lower right, above the signature line. The officer than signs below the name of the corporation. Since the corporate name actually appears on one of the signature lines, it could be argued that the personal liability of the officer is clearly negated as a matter of law. While this argument has been rejected by the judiciary, officers have been relatively successful in rebutting the presumption of liability when using this type of check.

For example, in the frequently cited case of Pollin v. Mindy Mfg. Co., Inc., certain checks bore the name and address of the corporation at the top left, and the name only above two blank lines appearing in the lower right hand corner. In addition, the checks bore the inscription (below the address of the company) "Payroll Check No. ." When a third party acquired the checks, it sued the signing officer in his individual capacity.

The court held that the plaintiff had no cause of action against the officer individually. The court stated that "the checks clearly showed that they were payable from a special account set up by the corporate defendant for the purpose of paying its employees..." The court also observed that since "corporations act through officers," a common business expectation is that corporate checks will bear the signature of some authorized party, which does not suggest that the signer intended to be personally bound on the check.

The Pollin decision, clearly, represents an attempt by the judiciary to recognize the business expectations of the parties. It has been cited with approval in at least one legal treatise, but it probably does nt represent the majority rule. One court, which chose to follow the Pollin precedent, stated that "common business expectations may not be consistent with a strict reading of (the Code)." Another court refused to follow the Pollin precedent where the check bore the name of the corporation only, and not the inscription "payroll check." Thus, while the Pollin decision may represent a tendency by some courts to recognize the common business expectations of the parties, most courts prefer to apply the strict language of the Code. The result, in many cases, is that the officer is held personally liable on the check.

SUMMARY AND CONCLUSIONS

There may well be a common understanding in the business community that a check drawn on a corporate account is intended to represent the obligation of the corporation only, and not the individual officer signing the instrument. While a few courts have recognized this understanding, the majority of courts in this country have applied the strick language of the Uniform Commercial Code, with the result that in many cases, the officer signing the check has been held personally liable on the instrument. Accordingly, officers of corporations who wish to avoid personal liability should be careful to sign corporate checks in a fashion which clearly indicates their agency status. The recommended method of signing checks is as follows:

"The XYZ Company, by

John M. Smith, Pres."

If the check bears the name and address of the corporation elsewhere on the instrument, the signature "John M. Smith, Pres." would be adequate, although the first form is preferable. For the sake of convenience, corporate checks could be printed in such a way as to have the name of the corporation, followed by the word "by," printed in the lower right of the check. In that case the officer would merely have to write his name and title beneath the inscription. When a check is signed in the fashion indicated, the representative capacity of the officer cannot be questioned. Such an instrument is enforceable against the corporation only, not the individual, no matter who should acquire the instrument. As the cases cited in this article demonstrate, failure to sign a check in the recommended fashion may result in significant and unexpected liability.