The Appellate Court of Connecticut has held that a promoter of an LLC is liable on a contract made in the LLC’s name but before formation and therefore had the power to transfer the contract to another entity that could sue to enforce the contract. In BRJM, LLC v. Output Systems, Inc., Nicholas Kepple agreed to purchase real estate from Output Systems, Inc. The purchase contract was made in the name of M & K Realty, LLC, which was an entity to be co-owned by Kepple and his friend McGuiness (gee, how’d they think of THAT name?). After the contract was formed, McGuiness pulled out and Kepple assigned the contract to BRJM, LLC, an entity he owned. When a subsequent appraisal revealed that the property was worth twice the contract price, Output Systems refused to close and BRJM sued. One defense was that the contract was void because M & K Realty, LLC had not been formed when the contract was executed.
Justice Schaller held that, as a matter of first impression, the individual entering into a contract on behalf of a non-existent LLC is personally liable. The court relied on Restatement (Third) of Agency § 6.04 for the proposition that an “agent” is liable on a contract entered into on behalf of a non-existent principal. Justice Schaller acknowledged that this rule was to protect third parties, not to empower individuals who contract on behalf of non-existent entities. The court also drew an analogy to promoter liability in the corporate setting, both under common law and under MBCA § 2.04, which would hold the promoter liable.
Although the court acknowledged that the Restatement section and promoter liability rule are intended to protect third parties rather than to empower promoters, it held nonetheless that those rules allow promoters to enforce such contracts as well. Thus Kepple was liable on the contract, could enforce it, and thus could (and did) assign it to a third party.
It’s not clear to me that this case must be correct. Certainly the legal rules the court invokes do not stand for the result the court reached. The doctrine of entity by estoppel might do the trick. Here, Output Systems intended to deal solely with M & K Realty, LLC, which could induce the court to hold that Output Systems was estopped to challenge that entity’s existence. That doesn’t, by itself, permit Kepple to transfer the contract in M & K Realty’s name to another entity, though. However, given that the plaintiff is, in effect, a limited liability entity owned and controlled by Kepple, one might analogize this situation to the entity by estoppel setting.
This case could be taught after, or instead of, P.D. 2000, L.L.C. v. First Financial Planners, Inc. on page 745.