On appeal from the Superior Court, Law Division, Atlantic County.
Pressler, Bilder and Gruccio. The opinion of the court was delivered by Pressler, P.J.A.D.
[210 NJSuper Page 160] This appeal raises the issue of whether a sole proprietor enjoying the benefit of an ongoing credit relationship with a supplier remains personally liable for debt incurred by his business after its incorporation, absent notice to the trade creditor of the incorporation.
Defendant John Giordano, Sr. appeals from a judgment entered in the Superior Court, Law Division, after a bench trial, holding him liable for the cost of fuel delivered by plaintiff Taylor Oil Co. to defendants Giordano Heavy Equipment Corp. and South Jersey Bulk Handling Corp. The corporations incurred these debts in the course of a credit relationship established with plaintiff by Giordano, Sr. while he was operating as Giordano Heavy Equipment Rental, a sole proprietorship. Defendant John Giordano, Jr. was held not liable.*fn1
According to Judge Weinstein's findings, plaintiff began supplying fuel to the Giordanos for the operation of their vehicles and equipment in Port Newark in 1979. After checking Giordano, Sr.'s credit, plaintiff entered into an oral open-account arrangement with Giordano, Sr., requiring payment within 30 days after delivery. Eventually, plaintiff also started supplying fuel to the Giordanos' operations in the Camden port area, which they commenced in late 1980 or early 1981. In May 1981 the two Giordanos incorporated Giordano Heavy Equipment, Inc., which continued the business of the proprietorship and of which they were the sole officers and stockholders. By October 1981 the business was using corporate checks and stationery, had opened corporate bank accounts, and had the corporate name painted on its equipment and on signs posted at the work site. The Giordanos did not, however, furnish plaintiff with notice of the incorporation, and plaintiff had no knowledge thereof until it finally stopped doing business with the Giordano businesses in March 1984.*fn2 The Giordano firm began falling
behind in its payments sometime in 1982. Although the Giordanos continued to make some payments on the account and both father and son continually reassured both plaintiff's president and its regional sales manager that they would meet their obligations, their net outstanding balance, including interest charges, had reached $38,000 by July 1983. At the end of March 1984, after plaintiff had tightened its credit terms and at the point when it ceased doing business with Giordano, the total debt, including interest, was $44,231.74. The precipitating cause of plaintiff's termination of its business relationship with the Giordanos was its discovery that it was dealing with a corporation rather than the proprietorship with whom it had commenced its dealings. Upon the Giordanos' refusal to guarantee the corporate debt, plaintiff refused to extend further credit.
Based on these findings, the trial judge entered judgment for plaintiff in its action on the debt not only against the two corporations but also against Giordano, Sr., concluding that although there had been no fraud by the Giordanos, plaintiff had neither known nor received notice of the change in business organization. He therefore held that Giordano, Sr., as the sole proprietor of the original business, remained liable for the debts of the corporations. It was his view that allowing the corporate form to insulate Giordano, Sr. from liability under these circumstances would constitute a "manifest injustice." We affirm, rejecting Giordano, Sr.'s contention that the trial judge erred as a matter of law in disregarding the corporate form.*fn3
Although the issue here presented has not been considered in a reported decision in this state, the trial court's determination was consonant with the rule, followed in other jurisdictions, which imposes continued liability on the principal of an unincorporated business for those post-incorporation
debts incurred in the course of an ongoing credit relationship commenced prior to incorporation, unless the creditor receives notice or has or is chargeable with knowledge of the intervening incorporation.*fn4 See, e.g., Kapp v. Naturelle, Inc., 611 F.2d 703, 709 (8th Cir.1979); Johnson Brothers Oil Co. v. Chies, 293 Minn. 363, 199 N.W. 2d 441 (1972); Letellier-Phillips Paper Co. v. Fiedler, 32 Tenn.App. 137, 222 S.W. 2d 42 (Ct.App.1949), cert. den. (1949); Philipp Lithographing Co. v. Babich, 27 Wis. 2d 645, 135 N.W. 2d 343 (1965); Johnston v. Biehl, 7 Wash.App. 757, 502 P. 2d 1027 (Ct.App.1972). Cf. Kingsberry Homes v. Corey, 457 F.2d 181 (7th Cir.1972) (where principals had executed written guarantees, they remain liable to supplier for obligations of subsequently formed corporation even where supplier had notice of incorporation).
We are persuaded that the rule of continuing liability is commercially reasonable and jurisprudentially sound. It is evidently predicated on the perception that one seeking the broad immunity from personal liability afforded by incorporation should be obliged to give appropriate notice of incorporation to those of its creditors who have been induced to enter into business arrangements in reliance on the principal's personal credit. We are satisfied that as a matter of commercial necessity, the principal cannot be permitted unilaterally to defeat the expectations of the creditor by the ...