The Argument that Corporations Lack Continuity of Life Soundly Rejected

The Argument that Corporations Lack Continuity of Life Soundly Rejected

One of the greatest and perhaps the most innovative characteristic of the business corporation is that it has continuity of life – while the shareholders may come and go the corporation continues to exist as the same corporation.  This characteristic was recognized in the seminal Trustees of Dartmouth College v. Woodard, 17 U.S. (4 Wheat.) 250, 303 (1819) decision:

“Among the most important are immortality, and, if the expression may be allowed, individuality; property, by which a perpetual succession of many persons are considered as the same, and may act as a single individual.  They enable a corporation to manage its own affairs, and to hold property, without the perplexing intricacies, the hazardous and endless necessity of perpetual conveyances for the purpose of transmitting it from hand to hand.  It is chiefly for the purpose of clothing bodies of men, in succession, with these qualities and capacities, that corporations were invented, and are in use.  By these means, a perpetual succession of individuals are capable of acting for the promotion of the particular object, like one immortal being.”

A recent effort to have a different rule, namely that a change in ownership of a corporation relieves the corporation of its pre-existing obligations, was recently soundly rejected.

Quality Ford Automobile Sales, Inc. v. Ford Motor Credit Company, LLC, No. 2010-CA-000397-MR (Ky. App. July 22, 2011) (Not to be Published) involved a creditor, FMCC, seizing its collateral, namely the inventory of QFAS.  The security agreement at issue was entered into in 1989 between FMCC and QFAS.  In 1997, ownership of QFAS was transferred from its prior owners to Allyn Moore. 

In this suit, Moore/QFAS argued that the security agreement was not valid as a new agreement should have been entered into in 1997 when Moore acquired ownership of QFAS.  “In essence, [QFAS] argues that because of ownership of the dealership changed, the previous contract did not apply.”  Slip op. at 4.  In response the Court wrote: “This argument is without merit.” 

Citing KRS § 271B.3-020(1) (a corporation has perpetual duration) and subsection (g) thereof (a corporation may enter into security agreements), the Court held that the 1989 security was never terminated and, ergo, continued to bind the collateral.