Miller v. Celebration Mining Co.

DURRANT, Justice:

T1 In April 1994, Thomas Miller, former president of the administratively dissolved corporation United Silver Mines, Inc., and Howard Crosby, the chairman of Celebration Mining Company, allegedly entered into a written agreement. This agreement purported to give Celebration an interest in the Vipont Silver Mine, which Miller represented as being owned by United, in exchange for cash, shares of Celebration's common stock, and other expenditures. Plaintiffs Miller, United, and James Kontes filed this action as a result of the alleged failure of defendants Celebration, Crosby, and Royal Silver Mines, Inc. (Celebration's successor in interest), to adhere to the terms of the agreement. Defendants moved for summary judgment. The trial court granted the motion, holding the agreement was void because United had been administratively dissolved in 1991, and, therefore, could not validly enter into the April 1994 agreement. Plaintiffs appeal this decision. We affirm.

BACKGROUND

12 "In reviewing a grant of summary judgment, we view the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party.... We state the facts in this case accordingly." Tretheway v. Miracle Mortgage, Inc., 2000 UT ¶ 2, 12, 995 P.2d 599 (citations omitted).

T 3 United Silver Mines, Inc., was administratively dissolved on August 1, 1991, for failing to file an annual report. Prior to its dissolution, all of United's shares were owned by Thomas Miller and his wife, Sharon,. Nearly three years after United's dissolution, in April 1994, Thomas Miller, who had been United's president, entered into a written agreement with Celebration Mining Company, the terms of which purported to transfer an interest in the Vipont Silver Mine, consisting of 53 patented lode silver mining claims on approximately 1,000 acres, from United to Celebration in three separate phases. The agreement was signed by Howard Crosby, as Celebration's chairman, and Miller, as United's president. Under Phase I of the agreement, Celebration would receive a 20% interest ¹ in Vipont in exchange for issuing 1,000,000 shares of its common stock to United and another 1,000,000 shares to James Kontes. Further, Celebration would retain Kontes and Miller for $3,000 per month for at least a twelve-month period. Under Phase II, Celebration would acquire an additional 30% interest by paying $300,000 in cash to United and by removing all liens against the property before June 1, 1995. In Phase III, Celebration would receive another 30% interest for spending at least $4,000,000 on mine development before June 1, 1998.

14 Plaintiffs Miller, United, and Kontes² filed this action against defendants Celebration, Crosby, and Royal Silver Mines, Inc. (Celebration's successor in interest), asserting six causes of action: (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (8) fraud, (4) negligent misrepresentation, (5) rescission, and (6) unjust enrichment.

T5 Defendants answered the complaint and filed both a counterclaim and a third-party complaint. Defendants then moved for summary judgment as to plaintiffs' claims. As to United, the defendants contended the April 1994 agreement was void because United had been administratively dissolved three years earlier and, therefore, could not properly enter into the agreement. As to Miller, the defendants contended that because he acted in his capacity as president of United in executing the April agreement, he was not a party to the agreement and therefore could not individually enforce its provisions. As to Kontes, the defendants argued he did not have standing to take part in the action as he was merely a third-party beneficiary to the agreement. In response, plaintiffs contended that because Miller acted for a dissolved corporation, he became a party to the agreement, enabling him to enforce its provisions on behalf of plaintiffs, The trial court determined the agreement was void and, accordingly, granted defendants' motion for summary judgment as to plaintiffs' claims. Plaintiffs appeal this ruling.

ANALYSIS

16 The only issue plaintiffs raise on appeal is whether the trial court erred in ruling that Miller could not enforce the agreement he purported to enter into on United's behalf. Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Utah R. Civ. P. 56(c). "We review the trial court's summary judgment ruling{ ] for correctness." Sur. Underwriters v. E & C Trucking, 2000 UT 71, ¶ 14, 10 P.3d 338. We conclude the trial court's dismissal of plaintiffs action was correct because the parties' agreement was voidable at defendants' option, and defendants opted to void the agreement.

7 Plaintiffs contend this case is governed by section 16-10@2-204 of the Utah Code. That section, entitled, "Liability for preincorporation transactions," provides, "All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting." Utah Code Ann. § 16-10a-204 (1999). Plaintiffs argue that, notwithstanding its title, this section governs both pre- and post-dissolution liabilities.

18 However, even assuming section 16-102-204 applies to contracts entered into following a corporation's administrative dissolution, that section does not address the question of whether plaintiffs have the right to enforce the agreement. Section 16-102-204 speaks only to the lability of "persons purporting to act as or on behalf of a corporation." Id. It does not refer to any ability by such persons to enforce contracts.

T9 As the question of whether these "persons" have the power to enforce contracts is beyond the scope of section 16-102-204, we turn to the common law to resolve this issue. We have not previously addressed this issue. On the one hand, plaintiffs urge us to rely on the common law principle of "mutuality of obligation," which requires that where a party is held contractually liable under a given set of cireumstances, that party is also able to enforce the contract on its own behalf under those same cireumstances. See Gardmer v. Madsen, 949 P.2d 785, 789 (Utah Ct.App.1997). Thus, plaintiffs argue, as Miller would be liable, under section 16-10a-204, for liabilities created while he "purport[{ed] to act as or on behalf of a [non-existent] corporation," id., he would also be able to enforce the agreement he entered into with Celebration when he "purport[ed] to act" on United's behalf, pursuant to the principle of mutuality of obligation.

T10 On the other hand, defendants contend the agreement should be voidable at their option as they had intended to contract with United, not Miller individually. Defendants' position finds support in section 164(1) of the Restatement of Contracts. That seetion states, "If a party's manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient." - Restatement (Second) of Contracts § 164(1)-(1981). Thus, under this section, for a contract to be voidable, it must meet each requirement of a four prong test: first, there must be a misrepresentation, second, "the misrepresentation must have been either fraudulent or material," id. § 164 emt. a, third, "the misrepresentation must have induced the recipient to make the contract," id., and, fourth, "the recipient must have been justified in relying on the misrepresentation." Id.

{11 We agree with defendants that the agreement was voidable at their option. In so holding, we decline plaintiff's invitation to apply the principle of mutuality of obligation because, as demonstrated by the application of section 164(1) below, the application of the principle of mutuality of obligation in a case such as this one has great potential to create a contract one party never intended to enter.

112 We now turn to the application of section 164(1) to the facts of this case. The first requirement in applying that section is that there must have been a misrepresentation. Miller misrepresented to defendants that he was acting in his capacity as a representative of a corporate entity when, in fact, that corporate entity no longer existed.

€13 The second requirement is that "the misrepresentation must have been either fraudulent or material." Id. The identity of the parties to a contract is, as a general rule, a material part of the contract. See, eg., Zurcher v. Herveat, 238 Mich.App. 267, 605 N.W.2d 329, 336-38 & 337 n. 11 (1999) (noting the identity of the parties is an essential term of a contract involving a transfer of interest in real property and citing cases). Allowing the party that misrepresented its identity to enforce the contract may compel the innocent party into a contract it might otherwise be unwilling to enter as identity is inextricably tied to one party's assessment of the other's capacity to perform on the contract. This is especially true where a contract contemplates an ongoing relationship rather than a single transaction. In this case, the agreement between the parties involved an ongoing relationship, including a minimum one-year employment term for both Miller and Kontes, as well as development of the Vipont mine over a three-year period. Whether or not the misrepresentation was made knowingly,³ it was material to the agreement.

{14 The third requirement is that "the misrepresentation must have induced the recipient to make the contract." Restatement (Second) of Contracts § 164(1) emt. a. Where the misrepresentation is material, as here, we presume that this factor is met, "in the absence of facts showing the contrary." Id. § 167 emt. b. Plaintiffs have not pointed to any facts to undermine the conclusion that the identity of the contracting party "induced [defendants] to make the contract." Id. § 164 emt. a. Indeed, the record evidence cited by the parties makes clear that but for the representation that United owned the interest in the Vipont mine and was capable of entering into a joint venture with Celebration, defendants would have had no reason to enter into the contract with United. Accordingly, the third prong is met.

115 Finally, for the contract to be voidable, "the recipient must have been justified in relying on the misrepresentation." Id. As with the third prong, where a party relies on an assertion of a material fact, that reliance is presumed reasonable. Id. emt. d. Plaintiffs have pointed to no record evidence from which we could conclude defendants were not justified in relying on Miller's misrepresentation. Miller purported to act as the president of United, and it is undisputed that at some point United did hold an interest in the Vipont mine. Under these cireum-stances, we can only presume it was reasonable for defendants to believe United had the capability to enter into the joint venture agreement between the parties.

T16 Accordingly, the requirements of seetion 164(1) are met in this case through Miller's misrepresentation of the identity of the, contracting party. The contract was, therefore, voidable at defendants' option, and defendants' actions make clear they wished to void the contract. Thus, we agree with the trial court's conclusion that the agreement was void and, therefore, affirm the dismissal of plaintiffs' claims against defendants. |

T 17 Associate Chief Justice RUSSON, Justice WILKINS, and Judge ROGER A. LIVINGSTON concur in Justice DURRANT's opinion.

{18 Having disqualified herself, Justice Durham does not participate herein, Third. District Judge ROGER A. LIVINGSTON sat.

1 . Plaintiffs assert this was later modified to reflect a 25% interest.

2 , While not a signatory to the agreement, Kontes, nevertheless, claimed a legal interest in the agreement, evidently as a third-party benefi-clary.

3 . Whether Miller had actual knowledge that United was dissolved when he entered the contract is irrelevant to determining whether the term is material.