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Martin v. Peyton, 1927 - Pg. 118

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Facts: A banking and brokerage business was struggling and was in debt. There was language in the transaction about security and collateral. Issue: Did this create a partnership? What do we call the ∆? Analysis: provisions were not enough to create a partnership. The ∆ wanted to call themselves trustees. They argued they were just a lender. Rule: a person is NOT a partner if the person receives profits in payment of a debt by installments or otherwise.Conclusion: The trustees had some control over the books and loans had to be approved by the trustees. Trustees agreed upon resignations. Looking at all the factors, there is Control, Management, Veto power But all these factors just show they were protecting their assets. There was no partnership created.Must look to whether the reason for sharing profits is to get repayment of a loanNOTE: In this situation, analyze the partnership aspects and then analyze the non-partnership aspects to determine if this is a partnership. “These factors say this is a partnership. These other factors say this is not a partnership. My determination follows.”**Exam Tip: Don’t stop analysis as to whether the two parties are sharing the profits. Look at the reasons why they are sharing the profits (ex. Could be to repay debt).Unlike these facts, if no rational present, revert back to legal presumption that they were sharing profits as partners even if they did not intend to.

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Simpson v Ernst & Young, 1994 - Pg. handout

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Facts: Ernst was getting rid of old geezers to avoid paying retirement benefits. In order to receive benefits Simpson would have to be an employee. E & Y said he was a partner and under the law they cannot be liable under the age discrimination law for actions toward a partner.Issue: Is Simpson a partner? Holding: No, employee not a partner. Rule: Partners bear a fiduciary relationship to each other; this duty is the utmost good faith, highest fidelity, fairness and loyalty.Partner Analysis: SASMOVF (factors to determine if he was a partner)Sharing profits, Access to books and records, Security – permanence, Management /control/ authority, Ownership Interests (UBT, Capital contribution), Voting rights, Fiduciary relationship.Factors the court looked to, to determine if he was a partner: salary, access to books and records, MEANINGFUL voting rights, permanence, management authority over his employeesGross IncomeExpenses Employees SalaryPartners ProfitsSimpson voted regarding documents. Advisory Board had veto power. Advisory Board selected by Nominating Committee; Nominating Committee selected by Management Committee; Management Committee selected by Chairman of the BoardCourt said Simpson had ILLUSORY VOTING RIGHTS, and therefore he was NOT a partner.

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Summers v. Dooley (1971)

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• Facts: Summers hired an employee despite objections of his partner Dooley. Summers now wants Dooley to reimburse him for half the costs of the additional employee.• Issue: Whether an equal partner in a two-man partnership has the authority to hire a new employee in disregard of the objection of the other partner and then attempt to charge the dissenting partner with the costs incurred as a result of his unilateral decision?• General Rule: In a partnership, business decisions must be decided by a majority of the partners. If the decision is equal, the partner(s) against the decision gets his way.o Exception: If a benefit had been received by the party whom objected to the hiring of the new employee, there would be a better case for estoppel. However, in this case, the court concluded the benefit was to the individual as opposed to the partnership. Ratification; objection really isn’t an objection if you (1) acquiesce; or (2) accept the benefits.

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National Biscuit Co. v. Stroud (1959)

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• Facts: Stroud informed his partner Freeman that he would no longer be liable for any deliveries made by Freeman, but Freeman still made deliveries. After business dissolved, Stroud lost money liquidating business’ assets and paying the debts. Can Stroud be held liable for deliveries that Freeman consented to but Stroud declined?o Difference between this case and Summers v. Dooley is that there is a 3rd party involved in this dispute (is there liability by partnership to a 3rd party?)• RUPA § 301 deals with partner’s liability to a 3rd partyo The question becomes whether the 3rd party reasonably believed the partner was an agent of the partnership (apparent authority)o Partner has power, as agent of the P/S, to bind the partnership entity to third parties.

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Kessler v. Antinora (1995)

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Facts: K & A entered into written agreement where K would profit money and A would act as GC for purpose of building and selling a house. K would front the money to start the project, and profits would be divided 60% to K and 40% to A after K was repaid. Agreement was silent about losses. RE market crashed & they lost money on the sale. K is seeking reimbursement from A for his 40% share of the lossesRule: Where one partner or JV contributes money against the other’s skill and labor, neither party is liable to the other for contribution for any loss. Therefore, upon loss of the money, the party who contributed the money is NOT entitled to recover any part of it from the party who contributed only services. Exception to the general rule b/c source of agreement was not between parties, but from the sale of the house. The “upon sale” language cost the parties b/c these terms used loosely did not allow the parties to be liable to one another for any losses.

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Rafael J. Roca, P.A. v. Lytal & Reiter, et al (2003)

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The partners in the law firm had an oral agreement• The agreed that two of them would split 65% of the profit• There were remaining partners that were to figure out on their own how they were splitting the remaining profits, and there was no clarification on whether or not they needed to buy in.The firm decided to ask one of the partners once the dispute arose, but they then realized that the specific partner could break up the firm; so they decided to get everyone to sign a withdrawal form, and they’d form an agreement.• The agreement stated that Roca was basically withdrawn as a partner until a resolution of the profit sharing dispute was resolved and if a resolution wasn’t figured out then Roca would remain withdrawn and would not be a partnerThe court said Roca was a partner and that this was implied, because a written agreement was not required.Rule: Party may prove the existence of a P/S through an express or implied agreement to share profits. ROL, Generally: In the absence of an agreement, the law presumes that partners and joint adventurers intended to participate equally in the profits and losses of the common enterprise

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Roach v. Mead

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What is considered “in the ordinary course of the business?”• If a third party reasonably believes that the services he has requested of a member of a partnership is undertaken as a part of the partnership business, the partnership should be bound for a breach of trust incident to that employment.o What a reasonable person would believe is within the scope of businesso That this belief is reasonable and is set out in the professional codeo The first two do not depend on the legal work that the partnership does• Courts interpret “within the course of business” very broadly

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Thompson v. Wayne Smith Construction Co, 1994

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Facts: Contractors didn’t get paid – 107k, only received 2500 so wanted to go after partners individually. In South Carolina, the judgment was against the partnership itself. The judgment against the partners individually was vacated. In Ohio, the judgment was against the partner and partnership. It went to the Ohio Supreme Court. That court affirmed the judgment against the individual partners. The judgment was registered here and they went after the funds here. They recovered from the partnership and there was no more money left in the partnership. In Indiana, the court said there was still an outstanding judgment, but that there were prior decisions barring the Court from addressing this case. This was stated to Thompson (the partner). They went after Thompson to get the rest of the money the partnership didn’t have.Issue: When can a creditor access the individual partner’s assets to satisfy a partnership debt?Rule: Go after individual assets of partners once all other means/assets of P/S have been exhaustedAnalysis: If the individual has separate contract with creditor = creditor of the individual = immediate access to partner’s personal assets. If creditor of P/S, then you must make first attempt to satisfy judgment from partnership property (no initial access to partner’s personal assets) WHY would law favor the individual creditors? Because they’ve only got one choice they can only go after the individual – a partnership creditor can go after both they have options. Conclusion: It’s important to be a creditor of the individual, and then you can get the assets immediately. But if you are a creditor of the partnership, there is more to it. You first have to attempt to satisfy judgment from partnership property – no initial access to partner’s personal assets. This is because a partnership creditor has two sources to redeem debt. But, the partner creditor only has one.

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Meinhard v. Salmon, 1928

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Meinhard v. Salmon, 1928Facts: Meinhard entered into venture with Salmon; Salmon put up money, Meinhard was to manage and operate the business. When the lease was up, Salmon signed a new lease with Gerry and didn’t tell Meinhard anything.Issue: Is there a fiduciary duty for one partner to tell the other partner about deals made by the other partner? Rule: There is a much higher standard among partners. If you are a partner, and a new project appears and it is in the same subject matter of the partnership’s business, then you must give the other partner the chance to compete.Analysis: The fiduciary duty extended beyond the first transaction because there is a higher standard than for what is normally found in those who do business at an arm’s length. The court was led to conclude this second transaction was an extension of the first. Also, the location was the same. You look to see if there can be an extension/enlargement of the subject matter.Conclusion: Yes, the duty exists. Salmon should have informed Meinhard of the opportunity, because it wasn’t just any new opportunity, it was the extension of an existing lease. “Here the subject-matter of the new lease was an extension and enlargement of the subject-matter of the old one.” Also, Salmon didn’t give Meinhard the chance to compete.Notes: Trustees are held to something stricter to the morals of the market place. Punctilio: fine point of exactness.**Exam Tip: Look to whether the new deal is an ENLARGEMENT of the first deal and in the same subject matter.

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Meehan v. Shaughnessy

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• Facts: Partners in firm were leaving and took 142 of 350 clients with them by sending them a letter; however, they sent the letter to the clients before they informed their firm which clients they were taking with them. Didn’t give the firm a chance to compete to retain those clients. The partners were asked by firm three times whether they were leaving and the partners lied and denied that they were leaving all three times.• Issue: Whether Plaintiff’s conduct violated a fiduciary duty owed to the remaining partners of the firm?• Holding: Because of these things, the partners breached their duty of good faith and loyalty that they owed the firm.

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Gibbs v Breed, Abbott & Morgan, 2000 - Pg. 104

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Facts: Two attorneys sent employee information of partnership to new firm prior to giving notice to other partners and prior to withdrawing from partnership. The attorneys and the new firm attempted to recruit other lower ranking attorneys of the firm before the attorneys had withdrawn from the partnership. The employee information the new firm received gave them an unfair advantage in recruitment, as the memo contained salary information, etc.Issue: Ultimate Issue: Was the employee information that was sent confidential? Holding: Breach of fiduciary duty; Partners shared confidential information about old firm with new firm while still partners at old firm. Analysis: Pre-withdrawal recruitment is generally allowed only after the firm has been given notice of the lawyer’s intention to withdraw. A violation exists if there is no notice prior to recruitment efforts, and it CANNOT be cured by any after-the-fact notification of withdrawal by the fiduciary who committed the breach.Conclusion: The attorneys are liable under this circumstance. The manner in which partners plan for and implement withdrawals is subject to the constraints imposed on them by virtue of their status as fiduciaries.Majority View – (Breach) Bonus information is unique to individual, and therefore confidential; salaries billable are available to the public.Dissent View – (Not a Breach) widely known standard rates for associates, regularly published, headhunter knowledge

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Rapoport v. 55 Perry Co.

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Facts: Two families went into business together 50/50 ownership. One family wanted to assign 10% of their interest to their children. Issue: May the Rapoport’s add children as partners without the consent of a majority of shareholders?Holding: NoRUPA § 501: A partner is not a co-owner of partnership property and has no interest in partnership property, which can be transferred, either voluntarily or involuntarily.RUPA § 502: The ONLY transferrable interest of a partner in a partnership is the partner’s share of profits and loses of the partnership and the partner’s right to receive net distributions.RUPA § 503(a)(3): Person receiving interest cannot be part of the management, nor can you get access to confidential information (i.e. books and records)• When partners have a lot at stake and potential for liability for other partners’ acts, they want to be able to pick who they share that liability with.Exam Tip: Can transfer interest for profits/losses/distributions, but CANNOT transfer mgmt obligations.

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Bohatch v Butler & Binion, 1998 - Pg. 123

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Facts: Bohatch reported she thought one of the other partners was overbilling one of the clients. Issue: Should there be an exception to the rule, providing that a partnership has a duty NOT to expel a partner for reporting suspected overbilling by another partner.Holding: No breach of fiduciary duty; firm did NOT owe Bohatch a duty not to expel her for reporting suspected overbilling by another partner. Rule: In a P/S, there is no duty to not expel a partner for things such as reporting suspected overbilling by another partner where you can establish personal confidence and trust at issue. Partners have no obligation to remain partners. Exception: Bad Faith (Ct. not define it, but Groves did) the opposite of “good faith” generally implying involving actual or constructive fraud, or design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligationAnalysis: The fiduciary duty that a partner owes imposes upon all the participants the obligation of loyalty to the joint concern and of the utmost good faith, fairness, and honesty in their dealings with each other with respect to matters pertaining to the enterprise. However, partners have no obligation to remain partners. *A partnership exists solely because the partners choose to place personal confidence and trust in one another. -Just as a partner can be expelled, without a breach of any common law duty, over disagreements about firm policy or to resolve some other “fundamental schism,” a partner can be expelled for accusing another partner of overbilling without subjecting the partnership to tort damages. Whether true or not, it may have a profound effect on the personal confidence and trust essential to the partner relationship. Once such charges are made, partners may find it impossible to continue to work together to their mutual benefit and the benefit of their clients. The threat of tort liability for expulsion would tend to force partners to remain in untenable circumstances – suspicious of and angry with each other – to their own detriment and that of their clients whose matters are neglected by lawyers distracted with intra-firm frictions.Conclusion: Judgment for Bohatch on grounds that the firm breached the partnership agreement by reducing Bohatch’s distribution to zero without notice.

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Gateway Potato Sales v. G.B. Investment Co. (1991)

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Facts: Creditor relied upon general partner’s statement about the limited partner being involved and the creditor thought it was a general partnership and the partners were acting like it was a general partnership.Issue: Is the limited partner liable to the general partners as a general partner?Rule: RULPA § 303(a) — Ways to keep LP status to exclude from reasonable belief• In the absence of actual knowledge of the limited partner’s participation in the control, a limited partner will be held liable as a general partner if his control is “substantially the same as the exercise of power of a general partner”; P can still prevail if establish o Creditor had a reasonable belief based on the limited partner’s conduct & comm.

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In Re: USACafes, LP Litigation - Pg. 1138

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Facts: The Wyly brothers had 100% of the stock in the corporation. They had 47% of the units in the LP. Then there is a transaction (asset purchase) with Messa. Wyly sold the assets for less than a fair price and the Wylys had a side deal to get a financial inducement of $15-17 million dollars to stop looking for a better offer.Issue: Did the Wylys breach their fiduciary duty of loyalty and care to the limited partnership? Rule: General partners owe a greater duty to the limited partners than their duty to their own corporation.Analysis: The court wanted to find a way to make the limited partnership whole. They employed the rule that these assets are property of the limited partnership. So, the fiduciary is a trustee of the property of the limited partnership. “One who controls property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the control to the detriment of the property or its beneficial owner.” The court imposed a constructive trust. “Sole shareholder/director of a corporate GP is personally liable for breach of fiduciary duty to LP.”Conclusion: Even without a showing of ill will, Wyly Brothers were acting to the detriment (wasting an asset – the $15 million) of the partnership.Notes: You will see more cases where the court says you can't let a person benefit to the detriment of the partnership or the others in the limited partnership. CONSTRUCTIVE TRUST - This allows a remedy of more than the money. But the π can get the property back with any interest that may have accrued.

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Kus v. Irving

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Facts: One partner did bad act, but plaintiff sued all three partners. The other partners knew nothing of the conduct of the bad partner. Holding: Because the firm was an LLP, other partners were protected against the bad acts of one partner. Rule/Reasoning: The innocent partners had no personal knowledge of negligence, no shared benefit, they did not receive any fees from the negligent act, and they had no supervision or control over negligent partner.• Apply the rule/reasoning to future facts and weave them in to new facts. Don’t just repeat rule, but apply rule and see if it can still favor different facts.

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Ederer v. Gursky

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Facts: Ederer was partner at firm, who withdrew from firm before it ceased operations. Sued LLP when they did not pay Ederer sums of money they were obligated to pay under the withdrawal agreement.Holding: Provision does not shield a GP in a LLP from personal liability for breaches of the partnership’s or partners’ obligations to each other.Rule/Reasoning: No P/S agreement; therefore, provisions of P/S law govern. “Any debts” only covers debts to third parties, not those to other partners; according to Partnership Law and the placement of the words “any debts”***One set of rules governs the relationship between partners (Article 4) and another set of rules governs relationship between partners and third parties (Article 3).

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Tachipour v. Jerez

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• Facts: LLC made Jerez manager, then included a provision in the Operating Agreement that limits his authority and does not allow him to obtain loans for LLC w/o permission of members. Despite this, Jerez gets a loan on behalf of LLC w/o permission, appropriates money for himself, and defaults on loan. Lender then forecloses on real estate owned by LLC.• Analysis: There are two statutes conflicting, one allowing Operating Agreement to limit manager’s authority and one saying that certain instruments for mortgage are valid and binding on LLC if executed by manager of LLCo More specific one governs

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Marie Kasten v. Doral Dental United States, 2006 - Pg. 185

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Facts: As part of a divorce settlement, Kasten received 23.1% membership interest in Doral Dental, LLC (DD). When DD started negotiating with potential buyers, Kasten started requesting certain documents from DD. DD complied with some requests, but not all. Kasten filed suit to enforce her rights, filing a motion to compel DD to release to her the records she requested.Issue: Are emails records under an LLC? Does her access to records extend to emails?Holding: No. Emails are not “documents or records,” but “communications.”Analysis: Under the LLC operating agreement Kasten had access to documents and other company records. DD argued that emails do not fall under that label and that Kasten should not see the emails because of the character of the LLC. Court looked at other types of organizations. In corporations and partnerships, there are narrow limits to what shareholders can see.Conclusion: As emails are not company records, allowing Kasten access to them would exceed the scope of her inspection rights. Notes: Supreme Court Decision 2007: Operating Agreement afforded access to more stored information than default inspections of LLC Act. Emails can be “company documents.” “Drafts” are “company documents.” “Reasonable request” for information refers to both breadth of documents (volume) and timing and form. Whether request is too burdensome or not requires balancing law’s bias for access versus costs of inspection to the LLC.Major issue comes from the fact that granting “access to ‘books and records’” is not defined

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Pepsi-Cola Bottling Co. v. Handy

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• Facts: Owner tries to sell land to Pepsi for development but knows it is full of wetlands and is not suitable for development. Owner then forms LLC to try to protect himself from liability.• Rule: Loopholes for an LLC only pertain to actions of the LLC (actions taken by the LLC after it was formed)o Loopholes do not pertain to actions the members of the LLC took before forming the LLC• Holding: Because actions were taken before LLC was formed, they were not protected by LLC o When there is fraud or misrepresentation, the member is acting in another capacity than solely as a member of the LLC.

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VGS, Inc. v. Castiel (pg. 1236)

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Facts: Three members on board of managers (including entities) and needed 2/3 votes to get anything done. Castiel formed LLC and had the ability to appoint, remove, & replace 2/3 of board of managers. The other two members, Sahagen and Quinn, merged the LLC into Corp., by recapitalizing it, without giving notice to Castiel and the LLC ceased to exist and all its assets passed to VGS.Analysis: In the Operating Agreement, it states:• Any matter that is to be voted on by managers can be voted on without a meeting, without prior notice and without a vote if a consent in writing…shall be signed by the managers having not less than the minimum number of votes that would be necessary to authorize such action at a meeting (2/3).Holding: The law allows them to do this merger, but because they acted in secrecy and did not give notice to the other member (Castiel), they breached their duty of loyalty to him and the merger was found to be invalid. Similar to Meinhard v. Salmon. Legislature never intended to enable two managers to clandestinely and surreptitiously deprive a third manager, representing majority interest in LLC, opportunity to protect that interest. Want to have notice provision in operating agreement.• Owed a duty of prior notice, even if C would have interfered w/ the plan; duty to give partner notice still exists, just like it did in Mienhard v. Salmon

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Fisk Ventures, LLC v. Segal (Inventor v. Investor)

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Facts: Joint board of 4 managers, 2 of which were appointed by Johnson, the principal investor and majority shareholder in Fisk Ventures, and 2 appointed by Segal, the founder of LLC. LLC was failing despite substantial financial backing from Johnson, so Segal wanted Class B members to suspend their “Put Right” to attract more investors. The Fisk Ventures seeks dissolution of the LLC. Segal counterclaims for 1) breach of LLC agreement; 2) breach of implied covenant of good faith and fair dealing; and 3) breach of fiduciary duty.Issue: Essentially, who is (re) paid first; initial investors, or new investors?Holding: No breach of LLC agreement. The loss of the company was not the result of gross negligence, fraud, or intentional misconduct by a member. Also, no breach of code of conduct because nowhere in the agreement does it create a “code of conduct” for all members.- No breach of good faith and fair dealing by not suspending their “Put Right” because the agreement requires a 75% vote of the board and it was the Class B members’ right to disapprove.- No breach of fiduciary duty because the agreement greatly limits the duties that members or managers have, and even if there was a fiduciary duty, Segal has failed to allege facts sufficient to support that anyone has breached a duty- Court not going to read in court’s equity power (VGS) rather sticks to terms in operating agreement.

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Anderson v. Wilder (pg. 1258) [Failure to State a Claim]

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Facts: LLC members were expelled and received a buyout price of $150 per unit. Shortly after, LLC sold units to third party for $250 per unit. Plaintiff filed action alleging Defendants actions violated fiduciary duty and duty of good faith.Analysis: Majority shareholders owe fiduciary duty to minority shareholders. Holding: Genuine issue of material fact exists regarding whether Defendants actions, expelling the minority shareholders, were taken in good faith, or if they expelled the member solely in order to force the acquisition of their membership units at a lower price in order to sell them at a higher price, in violation of fiduciary duty. • Not all come down to contractual freedom, but relates to existence of a good faith business justification, not simply a scheme to squeeze. o If good faith business justification exists, contractual freedom prevailso If unfair or deceptive, breach of fiduciary duty (that impliedly exists in all agreements to members and the LLC)• If Defendants sold at $250 for business justifications as opposed to just for the sole reason to get it at a higher price, it is likely that the trial court will find that was in good faith.

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Lieberman v.Wyoming.Com LLC(p. 1270)

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Facts:Liebermanwithdraws as a member of Wyoming.com and all remaining members unanimouslyaccepted his withdrawal as a member. Lieberman put in 20k. Court’s reviewis limited to the agreements because there is no statutory provision regardingthe rights and obligations of members upon the dissociation of a member. Rule: If member withdraws from LLC,and operating agreement does not specify how much member is entitled to, twooptions exist:1. Entitled to the amount of $$ in capital themember put in to the LLC2. Entitled to payment for member’s interest at fairmarket value Holding:Court states itwill NOT make the decision for the LLC, so member retains his interest in thecompany; maintaining status quo The operating agreement should either have an amountstipulated or a method as to which the withdrawing member should receive. Nothing in the law or agreement to determinewhat you should be paid. ***If this happens,member will want to ask for a dissolution àforces LLC to give interest at fair market value

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Dunbar Group,LLC v. Tignor(p. 1282)

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Facts:Member of LLCwants to expel another member who acted wrongfully, but the bad actor wants todissolve the LLC. Issue: Dissolve the LLC or just expel member but keep entity going? Holding:Court decided itis reasonably practicable for LLC to continue and denied dissolution Rule: Court may grant dissolution of an LLC if it is not reasonablypracticable to carry on the business in conformity with the articles oforganization and any operating agreement- Corporate characteristic of LLCs allow forperpetual existence of company, even if/when rightful member leaves.

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Dole FoodCompany., Proxy Statement - Pg. 205

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Facts:Incorporated inHawaii, created a subsidiary company in Delaware, and reincorporated there. Why reincorporatedin Delaware from Hawaii1. Precedent dealing with corporations that is veryfavorable to corporations2. Corporate laws that made it easier for BOD toavoid liability a. Evenif there is liability, the corporation will provide for indemnification i.The corporation will pay for the board members liability3. Gave the Corporation better clarity on how to payexpenses of BOD4. Delaware reduces size of quorum in importantcorporate decisions They have“anti-takeover” implications a.Increases power of management5. Delaware law allows dividends to be paid out ofsurplus of the corp or, if there is no surplus, out of the net profits of thecorp for the current fiscal year or the prior fiscal yeara. Easier for people to get dividends for peoplewith a lot of stock options/shares (BOD)Poison-Pill—the anti-take-overdoctrine/provisions in the articles that make it harder for outsiders to takeover the company. Someone who wants totake over company takes shares of existing shareholders (even if adverse tointerests of BoD)…so they take the pill (buy the shares) but provisions say ifyou do this, the poison part is that provisions in bylaws that say those thatare existing shareholders or board members have the right to BUY BACK what youjust bought. ANTI-TAKE-OVER REMEDY.

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Stanley J How& Assoc., Inc. v Boss, 1963 (p. 185)

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Facts:Howe performedservices under a contract. Boss signed the contract on behalf of thecorporation about to be formed. Bosssigned as an agent of “corporation to be formed” & asked Howe if that wasok. The project was abandoned and the architect (Howe) was not paid.Issue:Is the promoterpersonally liable for transactions that occur before the formation of thecorporation?Analysis:Yes, acorporation is not liable on a promoter’s contract unless it expressly orimpliedly adopts or ratifies it. Apromoter will be personally liable unless promoter had a contract with π thatstated that π or someone other than the promoter would pay the obligation.Rule: A promoter, though he may assume to act on behalf of the projectedcorporation and not for himself, will be personally liable on his K UNLESS theother party agreed to look solely to the new corporation or some otherperson for paymentConclusion:Boss waspersonally liable for the K. Since the Kdid not state that the architect would look to the corporation that would beformed, the person who signed the contract (Boss) was liable.Notes:It is true thatHowe accepted a check or two from corporation “to be formed,” and Howe said hewas okay with Boss signing in place of the corporation. However, even if some facts indicate someability to look to the entity, the promoter is still on the hook. There was an implied warranty ofauthority. As a signer, on behalf of theentity, the ambiguity is weighed against the promoter, in favor of the entitydealing with the corporation to be formed. Two pieces of advice you could give the promoter asan attorney: 1) The entity should be formed first and then sign the document;2) Ratification

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Robertson v Levy, 1964 - Pg. 191

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Facts:The promoter(Levy) was supposed to form a corporation which was to purchase Robertson’sbusiness. Levy filed articles ofincorporation but began doing business prematurely before getting thecertificate of incorporation. Robertsonexecuted a bill of sale to Penn Ave. Record Shack, Inc., disposing of theassets of his business to the “corporation” and received in return a noteproviding for installment payments signed “Penn Ave. Record Shack, Inc. byEugene M. Levy, President.” He took overthe lease and began to operate the business. Later, the certificate of incorporation was issued. One payment was made on the note, not surewhen. The corporation went out ofbusiness a few months later.Issue:Can thepresident of an “association” who filed its articles of incorporation, whichwere first rejected but later accepted, be held personally liable on anobligation entered into by the “association” before the certificate ofincorporation has been issued? Is thecreditor “estopped” from denying the existence of the “corporation” b/c, afterthe certificate of incorporation was issued, he accepted the first installmentpayment on the note?Analysis This could be an Essay Question: 1) De jure: Incorporatedwith everything mandatory was there2) De Facto:Defectively incorporated (Goodfaith effort) Requisites for a corporation defacto: 1) A valid law under which such a corporation can be lawfully organized 2) An attempt to organize thereunder 3) Actual user of the corporate franchise >Somecourts require good faith in claiming to be & in doing business ascorporation3) Corporation byEstoppel: There was no corporation.The court didn’t go into and courts now don’t gointo the difference between the 3 above. There are now simple rules and courtsneed only look to MBCA §2.04 for the liability of the person transacting duringpre-incorporationConclusion:An individual who incurs statutory liability on an obligation because he hasacted without authority is NOT relieved of that liability where, at a latertime, the corporation does come into existence by compliance with statute.- Analysis: (1) Look to see the date when thecorporation was accepted (2) Ifasking for MBCA and other applicable law, look not only to MBCAprovision, but also to common law cases (de facto and de jure) and explainviews of judges- De facto and de jure sometimes still used incommon law - Promoter liable; good-faith effort not goodenough. Ambiguity = promoter liability.

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Bartle v Home Owners Co-op, 1955 - Pg. 206

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“Tobleed is not to pierce”Facts:Homeownerspriced housing for vets in a way that left no profit for buildersIssue: Under what circumstances should we allow thepiercing of the corporate veil of a legitimate subsidiary corporation to reachthe parent corporation? Can acorporation be formed just to escape personal liability?Analysis:The law permits the incorporation of a business for the very purpose ofescaping personal liability unless there is some type of fraud,misrepresentation, or illegality.Conclusion:Because therewas not fraud, misrepresentation, or illegality, Court would not piercecorporate veil. Must be intent to commit above act topierce veil. Exam Tip: Look to see if the subsidiary or parent corp did something that isfraudulent, misrepresented the facts, or intended to deceit; if so CITE THISCASEBut short of this, cts do not pierce corp veil. Even if you set up an entity to just “breakeven” you still do not disregard the subsidiary.

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Dewitt vFlemming Fruit, 1976 - Pg. 208(Corporation-principal shareholder scenario)

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Facts:Main shareholdersets up corporation to transport fruit and contracts a trucking company to dothe transporting. Trucker never is paidand wants to pierce corporate veil. Issue:Can thecorporate veil be pierced? YESConclusion:Can pierce thecorporate veil because shareholder was not conducting corporation like acorporation. The alter-ego theory (alter ego doctrine) could be used to get to theindividual. Using the factors below,this person fails most of the factors that would permit piercing the corporateveil. Flemming withdrew cash from entitythat was available at the time.

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Baatz v ArrowBar, 1990 – Pg. 215

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Facts:McBride crashedinto Baatz after drinking at Arrow bar and Baatz wants to sue shareholders ofbarIssue:Can ∏ pierce thecorporate veil to hold the shareholders liable?Analysis:Undercapitalization(do you have enough money to run the business?) is one indicia of proof of thefraudulent nature that gives reason to pierce the corporate veil. There is no evidence there were inadequateresources to run the business. Rule/Standard forundercapitalization: Do you have enough capital to run yourbusiness? Shareholders must equip acorporation with a reasonable amount of capital for the nature of the businessinvolved. Courts and statute don’t give specific time to lookto in determining whether business was undercapitalized; may look to time ofsetup and/or time incident occurred, but no clear cut review time givenConclusion:Because it is acorporate obligation and not a personal one, there is no basis for piercing thecorporate veil. If there’s enoughinsurance to cover the costs of operation in the event that something withinthe ordinary course of the business happens that’s covered by the insurance,the business will not be deemed undercapitalized.According to theCourt:No alter egoNoundercapitalizationNo lack ofcorporate formalitiesNo injustice**ExamTip: even if only $1,000 ofactual money was used and purchase price was $200,000, seems gross BUT use thiscase because if you also use the fact they had enough insurance to cover thebusiness, then THIS case would cover it.

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Radaszewski vTelecom, 1992 – Pg. 221

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Facts:MotorcycleaccidentLook to theundercapitalization aspect. In findingliability by a parent, look to whether the parent set up a subsidiary that isnot able to pay its bills AND had some deliberateness. This company had insurance and had met federalrequirements. This helps defeat theargument that it was undercapitalized.Rule: - Can onlyhave gross undercapitalization when parent sets up subsidiary in a way thatgrossly undercapitalizes the subsidiary that it cannot operate. - Thecreation of an undercapitalization subsidiary justifies an inference that theparent is either deliberately or recklessly creating a business that will notbe able to pay its bills or satisfy judgments against it. - “Making acorporation a supplemental part of an economic unit and operating it withoutsufficient funds to meet obligations to those who must deal with it would becircumstantial evidence tending to show either an improper purpose or recklessdisregard of the rights of others.”CorporateReality Quotes: - The statepolicy to encourage use of corporate form has a price. Some injuries are going to go un-redressedthrough lack of corporate money when shareholders have plenty of it . . . . - Thedoctrine of limited liability is intended precisely to protect a parentcorporation whose subsidiary goes broke.*EXAM TIPS: - Usethis on exam if facts indicate that the parent company set up the subsidiary tofail (not enough funds) - Consider all of the factors for alter ego, but grossundercapitalization has been, in some cases, enough to pierce the corporation - Whatif subsidiary was set up well and adequately capitalize, but later on,subsidiary was not able to pay bills because of bad judgment, then had thedriver that hit the plaintiff; should we be able to pierce corporate veil? - NO. Dicta says not pierce just because subsidiaryhas bad business judgment, just means you could pierce veil more often thannot. - Piercing isEXCEPTION, not the rule. Ability to setup corporation to avoid liability (can even say this).

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Fletcher v Atex,Inc. 1995 (p. 226) ,>

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Facts: Atex,a Delaware corporation & wholly owned subsidiary of Kodak, sued forrepetitive stress injury.Issue:That law of NYdetermines when the corporation form will be disregarded and liability will beimposed on the shareholders.Rule: “Creation of an undercapitalized subsidiary justifies an inference thatthe parent is either deliberately or recklessly creating a business that willnot be able to pay its bills or satisfy judgments against it.”Analysis:Single Economic Entity Test: π must show that the two corporationsoperated as a single economic entity (still must be injustice). Whether the subsidiary: 1) Was adequately capitalized for corporateundertaking 2) Was solvent (needs parent to survive) 3) Pays dividends 4) Has functional directors & officers(no parent domination) 5) Had corporate formalities (boardmeetings, records, taxes, etc.) 6) Has a lack of overall parent domination(day-to-day independence) 7) OVERALL injustice or unfairness if courtlets subsidiary stand on its own*Court said it’s fine if parent corporation operatescash management system; recognizes that it is practical. A cash management system is not enough toestablish single economic entity. If no comingling, it is ok for parent totake all the cash and disperse. Single economic entity may be found, however, if there is a comminglingof funds of parent and subsidiary. Conclusion: An overly dominant relationshipwas not shown. Plaintiff was not allowedto pierce. EXAM TIP: Putdifferent theories of piercing corporate veil in separate paragraphs.

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NissenCorporation v Miller, 1991(pg. 261)

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TheBattle BetweenThe“CONSUMER” and the “SUCCESSOR”Facts:π Brandtpurchased from Atlantic Fitness (seller) a treadmill. Nissen (successor) entered into an assetpurchase agreement with American Tredex (AT)(manufacturer) when AT wasdissolved. Brandt was injured whiletrying to adjust the treadmill. Brandt sued AT, Atlantic, and Nissen. Atlanticcross-claimed against Nissen for indemnity. Nissen’s motion for summary judgment was granted. Brandt and Atlantic appealed. Issue:Should the courtadopt the general rule of non-liability of successor corporations, with itsfour well-recognized traditional exceptions, or should it add a 5thexception?Rule: Bottom line—there must be a causal relationship between the injury andthe defendant’s act. Manufacturerà new owner = no causation andtherefore no successor liabilityAnalysis:Traditional Rule of Corporate Successor Liability: (4-part test)A corporation thatacquires all or part of the assets of another corporation does not acquire theliabilities and debts of the predecessor, unless:(1) There is anexpress or implied agreement to assume the liabilities;(2) The transactionamounts to a consolidation or merger;(3) The successorentity is a mere continuation or reincarnation of the predecessor entity; or(4) The transactionwas fraudulent, not made in good faith, or made without sufficientconsideration Thecontinuity of enterprise theory focuses on continuation of the business operationor enterprise where there is no continuation in ownership. The court didnot allow additional exceptionbecause it didn’t think successor in interest should have liability it didn’tbargain for. Liability exists if the operation and ownershipremain the same.

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Hanewald v. Bryan’s, Inc. 1988 (Don’t issue all shares authorized initially)

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Facts: · Bryan’sis a buyer and Hanewald is seller· Hleases building to B, so there is a lease agreement· B’salso has to buy the inventory, so issues promissory note since B doesn’t havemoney upfront· Pormissorynote wasn’t paid, corp involuntarily dissolved b/c failed to file annual reportw/ SOS· B’swent out of business b/c of watered stockRule: Shareholders held personallyliable b/c they didn’t pay for their shares, which precludes them from exercisingthe privilege of limited liability. These shares were “watered stock”Not asgood as piercing the corp. veil b/c can only recover amount that should’ve beencontrinbuted.Analysis: Watered stock analysis—Did theypay for their shares?1. Focuson ORIGINAL issues of stock2. Youhave watered stock when you have issuance of shares but no payment for shares3. Valueof stock is watered down when not paid fora. Didthey pay for the shares?b. Ifnot, then did they provide some other form of consideration for their shares?Exam Tips: · Lookto see if they only pay a little bit for the share, but not what they shouldhave paido Liabilitywill be different; this is ultimate to piercing the corporate veilCan have both principles in the same question

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Securitiesand Exchange Comm’n v. Ralston Purina Co. (1953) (pg. 310)

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o Securities Act of 1933exempts transactions by an issuer not involving any public offering fromregistration requirements of §5o Issue: whether Purina’s offerings of treasury stock toits key employees are within the above exemption?o Purina argued that keyemployees meant an individual who is eligible for promotion, influences/advisesothers, or who is sympathetic to management & ambitious · Purina used “key employees” classification in order toavoid definition of “public offering”o SEC argues that an offeringto a substantial number of the public isn’t exempt under the law (SECinterprets exemption as being inapplicable when large numbers of offerees isinvolved)o Holding: design of the Act is to protect investors bypromoting full disclosure of information thought necessary to informedinvestment decisions:· Employees here weren’t shown to have access to the kindof information which registration would disclose· Obvious opportunities for pressure & imposition makeit advisable that they be entitled to compliance w/ §5· Focus of inquiry should be on need of the offerees forthe protections afforded by registrationo Rule/Reasoning: absent a showing of specialcircumstances, employees are just as much members of the investing public asany of their neighbors in the communityo The more you narrow theexemption, the larger the group you hurt; more often the small business. Ifthey cannot have the exemption, they will have to pay more, and they may not beable to pay more.Exempt transactions when transactions are with peoplethat are knowledgeable.

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Smith v. Gross (pg. 318)

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Facts: Defendants sold Smiths worms and told them to breed them and thatthe worms would multiply 64x a year and the defendants would buy them back at acertain price per pound. The worms, infact, only multiplied 8x a year and plaintiffs were unable to get theirguaranteed profits.Rule: Investment Contract – in order to be a security,a scheme must involve:1. An investment of money2. In a common enterprisea. Argument it’s not acommon scheme: it wasn’t me and youb. The ct. said that it wasa common scheme: there was an automaticbuyback as part of that investment scheme. Here the facts illustrate that he was going to guarantee that he wasgoing to buy them back.3. With profits to comesolely from the efforts of others (not a franchise)a. Whether the efforts madeby those other than the investor are the undeniably significant ones, thoseessential managerial efforts which affect the failure or success of the enterpriseHolding: An investment contract existed. It isconsidered an investment contract b/c defendant guaranteed he was going to buythe worms back (evidence that it was a common enterprise). Third prong also metb/c profits were primarily reliant on defendant finding people to buy the worms(plaintiff relied on this).

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In Re Enron 2002 (p.822)

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Facts: Enron used Special Purpose Entities (SPEs) in a way that did notdisclose to the public the real purpose (they were solely to conceal Enron’sdebts)· SPEs were not viablefunctioning entities; they did not bring in their own income, etc.· SPEs do not show up oncompany’s “off balance sheet transactions” àsheet that people look at to determine whether company is a good investment ornot· Accounting firm (ArthurAnderson) no longer in businesses and failed to consolidate the statements likethey should have when 1000’s of SPEs existed.MOST COMMON WAY TO VIOLATE RULE 10(B)-5:overstate assets and understate liabilities

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Stokes vContinental Trust Co, 1906 - Pg. 322{David beatsGoliath}

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Facts:Stokes was a stockholderin Continental Trust Co. The successful nature of the business and surpluscaused a private banking firm to make an offer to double amount of company’sstock and purchase it, becoming shareholders. ∏ demanded right to subscribe(gain more stock from a company in which one already has stock) for 221 sharesof the new stock at par.Issue:Does shareholderhave the right to demand equivalent shares as what he had before when moreshares are authorized? Holding &Analysis: Yes, a shareholder has inherentproperty rights. The shareholder has aninherent right to proportionate share of any dividend declared and preventwaste or misappropriation, and to new stock issued for money only and not topurchase property. ∏ claimed he had a right to voteand that ∆ did not have the right to decrease his voting power. ∏ argued he was being deprived of his rightto property. He claimed there wasdilution of his shares when the total number of shares was increased and he didnot get any new shares. Conclusion:Dilution is notallowable because the other officers have no power to deprive ∏ of his inherentright as a stockholder. Must be given opportunity to buyadditional shares, but do not have to.Note:If there is anew issuance of stock and someone is left out of the new issuance, thatperson’s shares may be diluted. This maybe a case of dilution of rights.

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Katzowitz vSidler, 1969 - Pg. 326 (Exception to Waiver; Illusorypreemptive right)

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Facts:3-shareholder company; two wanted to oust Katz. They authorized 1000 shares & issued 5 to each. The Katz scheme: They issued more stock and paid for thestock; therefore an infusion of money even though money came from shareholdersthemselves. They then funneled thatmoney into corporation B.Issue:Did Katz waive his preemptive right?Analysis:They gave him the chance to buy in (he had a preemptive right). Stock was offered at $100 and was worth$1800. Conclusion:Issuing stock for less than fair value can injure the existing shareholders bydiluting their interest in the corporation’s surplus, in current and futureearnings and in the assets upon liquidation. Such action dilutes the equity interest to the vanishing point. Dilution When Total Shares Issued Increases from 15 to 65 w/o C’sParticipation.

**Newshares below FMV AND no business justification as to why offer so farbelow∏was given an illusory offering (new shares offered at price substantially belowFMV) Stock is worth $1800 per share, but onlyoption is to buy at $100 or lose rights all together.Nobusiness justification to issue shares far below FMV, therefore Court found itas scheme to squeeze out Katz.

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Dodge v FordMotor Co, 1919 - Pg. 341(Case is an exception to Business Judgment Rule)

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Facts: Henry Ford had a plan toincrease production and reduce price of cars. He wanted to build a large middle class. They had tons of profits. Issue: When there is a large amount ofprofits, must the corporation distribute dividends?Rule: “A business corporation isorganized and carried on primarily for the profit of the stockholders.” Holding &Analysis: Corporations cannot makedistributions that are arbitrary (no business justification for it) and againstthe best interest of the stockholders. The director’s refusal to declare dividends cannot be arbitrary. In most cases, the board of directors insteadof the court should be making the decision on when distribution of sharesshould occur from a surplus. But, if theboard is being arbitrary or acting in bad faith, the court will step in to dowhat they think is just, and authorize the dividend.Conclusion: The board had a noble plan. But in this case, the plan was not for theshareholder’s interest, or for their long-term interest in thecorporation. The plan was established asa type of community service effort focused on the employees, not theshareholders.GENERAL RULE: Courts will generally notinterfere in business judgments if there is a business justification. Will interfere when primary shareholdersbecome industrial society and shareholders become incidental; if primary reason(end goal) is not for shareholders’ benefit, BJR not apply.

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Wilderman vWilderman, 1974 - Pg. 345

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Facts:There was 50/50ownership in the Marble Craft tile company. After the divorce, Eleanor sued to have the excessive overpaymentsJoseph paid himself while President returned to the company and distributed asdividends. He kept certain profits forhimself as salary without paying any to her as the only other board member.Issue: 1) How much is authorized; 2)Quantum Meruit (an equitable remedy for the value of the services); and 3) Whatis the reasonable value of the servicesAnalysis: Several factors such as othersalaries paid by the employer, the amount previously received as salary, etc(pg. 348) would help determine if his salary was reasonable. Receive quantum meruit when board isdeadlockedConclusion: Joseph was ordered to return theexcess compensation.Notes: Remember these factors and howyou would deal with these factors in a factual situation.