Should I sign?

Hypothetical:  An individual (John) has a close relative (Janet), who is starting a not-for-profit business.  Janet sent John a text wanting them to run down to the bank to sign some papers for the company.  Upon arriving at the bank, John was handed a packet of 15 pages, and told to sign.  John signed.  Shortly after signing, John began to feel concerned about what they had done and made an inquiry with an attorney.  The attorney’s first question was ‘What did you sign?’, and requested copies.  John didn’t know what he had signed, and had not received copies, but indicated that he would request copies immediately.  The packet turned out to be the bylaws of the corporation and they signed under the space designated for the office of Secretary.  John was told not to worry about their signature, and that they would have no active participation in the corporation, but the organization needed a fourth board member to meet the minimum members for their non-profit tax status.

Should they have signed?

On these facts, the short answer is no.  From a day-to-day operational perspective, their signature is relatively benign, however, by signing the bylaws, they accepted a fiduciary relationship with the organization.  This carries certain legal promises, including the promise to uphold the bylaws of the corporation, and to maintain a standard of care with the organization.  The standard of care for an officer and director of the corporation requires that the officer perform their duties in good faith, that the duties must be performed in a manner which the director believes to be in the best interest of the corporation; and, the duties must be performed with such care, including reasonable inquiry, required under the circumstances. (California Corporations Code Section 5231)

Judging by the circumstances under which they were told to sign the bylaws, it didn’t seem that they would be given an opportunity to exercise their fiduciary duties with the corporation, which is an obligation of the office for which they signed.  The concern here is whether or not John would be personally liable for any of the debts and liabilities of the organization.  Again, from a day-to-day perspective, the answer is probably not, however, in the event of a legal issue, the court would first look to the articles of incorporation and bylaws and ask the question of whether or not the business was conducted according to the rules and regulations of those documents.

IF the directors of the company co-mingled funds, participated in self-dealings, didn’t hold annual meetings, or otherwise conduct themselves the way in which the corporation were required to operate, the court would ‘pierce the corporate veil’ and revoke their corporate status.  In this event, the court would then assume that the business was not a corporation, but was instead a partnership, and each board member acted as a partner of the company.  Under the rules of general partnership, each partner would be equally liable for the debts and liabilities of the company; therefore, any settlement against the company would be shared as a liability across each of the partners, including the secretary.  This risk could be offset by purchasing insurance, a likely action by the company, however, this information was not made known to John, and given the circumstances, something that John wouldn’t likely be allowed to audit.

John would argue that he had no actual, assumed or implied authority in that partnership, and that his signature was a ‘sham’ signature, which he gave in trust to Janet.  The court would likely side with John in this case, however, not without making a court appearance, filing several motions and otherwise hiring an attorney for many hours of work.  In this event, that signature would cost John thousands of dollars in fees.

Without any more information, the advice to John would be to not sign.  Having signed already, John should revoke his signature, by formally requesting his resignation.

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