Week 6 business law

MGMT 597 WEEK 6 HOMEWORKDeANGELA DIXONCASE 36.11

Business Ethics John A. Goodman was a real estate salesman in the state of Washington. Goodman sold to Darden, Doman & Stafford Associates (DDS), a general partnership, an apartment building that needed extensive renovation. Goodman represented that he personally had experience in renovation work. During the course of negotiations on a renovation contract, Goodman informed the managing partner of DDS that he would be forming a corporation to do the work. A contract was executed in August between DDS and Building Design and Development (In Formation), John A. Goodman, President. The contract required the renovation work to be completed by October 15. Goodman immediately subcontracted the work, but the renovation was not completed on time. DDS also found that the work that was completed was of poor quality. Goodman did not file the articles of incorporation for his new corporation until November 1. The partners of DDS sued Goodman to hold him liable for the renovation contracts. Goodman denied personal liability. Was it ethical for Goodman to deny liability? Is Goodman personally liable? Goodman v. Darden, Doman & Stafford Associates, 100 Wn.2d 476, 670 P.2d 648, Web 1983 Wash. Lexis 1776 (Supreme Court of Washington)John Goodman agreed to renovate an apartment building he had sold to DDS, a general partnership. Goodman informed DDS that he is forming a corporation to limit his personal liability. When the renovation contract was executed, DDS knew that Goodman Corporation was hot yet in existence. Goodman subcontracted the work and the work was not completed on time and the completed work was of poor quality. DDS had made payment to Goodman Corporation. When the work was not completed and it consisted of poor quality of workmanship, DDS sued Goodman.

According to the Concise Rule of Law:

When a corporation is contemplated but has not been organized at the time when a promoter makes a contract for the benefit of the contemplated corporation, the promoter is personally liable on it even though the contract will also benefit the future corporation

Since DDS was aware of Goodman Corporation and continued to make five consecutive payments to Goodman Corporation, was evidence enough to prove that Goodman Corporation was fully capitalized and operational.

The judgment was in favor of Goodman, because DDS continued making payment in the name of Goodman Corporation, and so it establishes the fact that Goodman Corporation was in existence.

Was it ethical for Goodman to deny liability? Is Goodman personally liable?

Goodman sold an apartment building to DDS, the apartments needed renovation and Goodman represented that he had experience in renovation work. During the course of negotiations on a renovation contract, the president informed the partnership that he would be forming a corporation in order to limit his personal liability. A contract contained an arbitration clause was executed. However, the work was not completed on time and was of poor quality. After the apparent default, the president filed articles of incorporation and a corporate license was issued. After many attempts to remedy the alleged breaches, the partnership served the president with a demand for arbitration. The demand named both the corporation and the president. The issue on appeal was whether the president, as a promoter, was a party to the pre-incorporation contract and as such whether he was required to take part in the arbitration. The court held that the trial court erred in dismissing the president from the arbitration proceedings because there was not substantial evidence that the partnership intended to consider the corporation the sole party with which it was contracting.

The decision of the appellate court, reversed the trial courts dismissal of the president from the arbitration proceedings, was affirmed, and the case was remanded.

Therefore, the court found that it was wrong for Goodman to be dismissed from the lawsuit.

It isnt illegal for Goodman to deny liability, he has the right to do so if he did nothing wrong. Its up to the trier of the fact to decide whether he did or didnt do anything. Ethically he knows that he is liable it would be wrong, but ethics and the law arent always linear in conclusion.

No, it was not unethical for Goodman to deny personal liability. At the time the contract was signed Goodman informed DDS that a corporation was being formed to do the work. While the articles of corporation werent actually completed until after the work was supposed to be finished, at all times Goodman represented that a corporation was doing the work and signed the contract on behalf of the corporation. Whether he will successfully maintain a corporate identity throughout the lawsuit is unlikely, but ethically he is okay.

The general rule is that a promoter is personally liable for the acts made on behalf of a corporation in formation. There is an exception, however, when the contracting party knows that the corporation is in formation and consents to hold the corporation liable for performance rather than the promoter.

The fact that the contract stated it was formed with a corporation in formation is not sufficient to prove that the promoter will not be held liable. Silence does not mean acceptance. However, some would hold that the silence of DDS is an implied ratification of the corporate entitys responsibility.CASE 37.5

Dividends Gay &s Super Markets, Inc. (Super Markets), was a corporation formed under the laws of the state of Maine. Hannaford Bros. Company held 51 percent of the corporation &s common stock. Lawrence F. Gay and his brother Carrol were both minority shareholders in Super Markets. Lawrence Gay was also the manager of the corporation &s store at Machias, Maine. One day, he was dismissed from his job. At the meeting of Super Markets &s board of directors, a decision was made not to declare a stock dividend for the prior year. The directors cited expected losses from increased competition and the expense of opening a new store as reasons for not paying a dividend. Lawrence Gay claims that the reason for not paying a dividend was to force him to sell his shares in Super Markets. Lawrence sued to force the corporation to declare a dividend. Who wins? Gay v. Gay &s Super Markets, Inc., 343 A.2d 577, Web 1975 Me. Lexis 391 (Supreme Judicial Court of Maine)As per the text the reason for the meeting needs to be stated and only the stated issues should be discuss in the meeting. I believe that Lawrence would win this case. He would be awarded the stock dividend.

This case involves an intracorporate dispute in which the plaintiff, Lawrence E. Gay, a shareholder, charges the board of directors with the use of illegal tactics to drive him out of the interest of the ownership structure of the business organization.

Gays Supermarket, Inc., incorporated under Maine Law is closely held corporation. A controlling interest of 51% of common stock is owned by the Hannaford Bros. Co. The plaintiff and his brother, Carroll V. Gay owned the remaining stocks in equal shares.

Hannaford is a food wholesaler and retailer, it conducted business thorough Gays Supermarket Inc. The plaintiffs major complaint was that the board of directors failed to declare dividend for the year 1972, and were not acting in good faith and in fact using this method as a means of forcing him to release his interest in the company. He characterized the boards action as a clear abuse of discretion and seeks equitable relief in the form of a mandatory injunction which would order that a reasonable dividend be declared and paid over to the owner of the common stock of the corporation.

The defendant, Gays Supermarket Inc., denied any such ill-will towards the plaintiff. The defendants board of directors had made a business decision for the benefit of the corporation. They had unanimously voted in favor of retaining funds, for the future expansion of the company and to cover the start up cost.

The court ruled that it cannot interfere with the sound business decision of the corporation and gave judgment in the favor of the defendant, Gays Supermarket Inc.

No, it was not unethical for Goodman to deny personal liability. At the time the contract was signed Goodman informed DDS that a corporation was being formed to do the work. While the articles of corporation werent actually completed until after the work was supposed to be finished, at all times Goodman represented that a corporation was doing the work and signed the contract on behalf of the corporation. Whether he will successfully maintain a corporate identity throughout the lawsuit is unlikely, but ethically he is okay.

The general rule is that a promoter is personally liable for the acts made on behalf of a corporation in formation. There is an exception, however, when the contracting party knows that the corporation is in formation and consents to hold the corporation liable for performance rather than the promoter.

The fact that the contract stated it was formed with a corporation in formation is not sufficient to prove that the promoter will not be held liable. Silence does not mean acceptance. However, some would hold that the silence of DDS is an implied ratification of the corporate entitys responsibility.The Super Market will win unless Gay can prove that the reasons offered by the directors were spurious and that their actions were clearly not consistent with sound business practices.Lawrence Gay, appellant, contended that Super Market, failed to declare a dividend for the year 1971, were not acting in good faith, but in fact were using this method as a means of forcing him to release his interest in the business. Appellees contended that the decision not to declare a dividend was due to projected capital needs of the enterprise and were not being motivated by ill will toward appellant. The court found that while appellants complaint was strong on allegations of wrongdoing on the part of appellees in adopting a policy of no dividend, appellant failed to present any evidence that the corporate decision was in fact motivated by ill will toward him. One of appellees testified that the dividend was withheld because of the contemplated expansion of the corporations facilities. Nowhere was there evidence in the record supporting appellants charges. It would have been necessary for the trial judge to infer from the mere fact of cash surplus, that the refusal to declare a dividend was an abuse of discretion. Given that the corporation had embarked upon significant expansion program, the court held that it was unable to say that there was an abuse of discretion. The court denied the appeal, therefore Lawrence Gay loses.CASE 37.7

Duty of Loyalty Lawrence Gaffney was the president and general manager of Ideal Tape Company (Ideal). Ideal, which was a subsidiary of Chelsea Industries, Inc. (Chelsea), was engaged in the business of manufacturing pressure-sensitive tape. Gaffney recruited three other Ideal executives to join him in starting a tape manufacturing business. The four men remained at Ideal for the two years it took them to plan the new enterprise. During this time, they used their positions at Ideal to travel around the country to gather business ideas, recruit potential customers, and purchase equipment for their business. At no time did they reveal to Chelsea their intention to open a competing business. The new business was incorporated as Action Manufacturing Company (Action). When executives at Chelsea discovered the existence of the new venture, Gaffney and the others resigned from Chelsea. Chelsea sued them for damages. Who wins? Chelsea Industries, Inc. v. Gaffney, 389 Mass. 1, 449 N.E.2d 320,Web 1983 Mass. Lexis 1413 (Supreme Judicial Court of Massachusetts)Chelsea would win and be awarded for damages. Officer of a corporation cannot steal ideas nor use the corporation for personal gain. This is known as usurping a corporate opportunity. An officer of a corporation cannot compete with the corporation. These individuals not only were competing, they were buying and putting their business together while working for the corporation. In this case two executive employees had violated their fiduciary duty while employed by Chelsea Industries Inc. The corporation was amply supported by his findings repeating their conducts during the two years period in preparing to establish a business which would compete with Chelsea Industries Inc.

When executive of Chelsea Industries found out about the new enterprise, the two executive Gaffney and the other executive resigned and Chelsea Industries bought suit against them for damages.

The corporation could recover damages in an action against the two executive employees for the breach of their fiduciary duty.

The judgment was given in favor of Chelsea Industries with recovery for damages and costs.

Employees occupying a position of trust and confidence owe a duty of loyalty to their employer and must protect the interests of the employer although none of the four joint ventures was an officer or director of Chelsea, their position likely meant they were trusted executives and, as such, they owed a fiduciary duty to Chelsea.

Chelsea would win. The damages would include lost profits, plus any monies Chelsea paid toward salary, travel, etc that were used by the men to further their own business.Corporate officers, directors, members and employees owe a duty of care to the corporation. Breach of duty is part of negligence lawsuit. In a negligence lawsuit there are four elements that have to be considered: duty, breach of duty, causation and damages. For breach of duty, it must be decided whether or not the defendant behaved in a way that a reasonable person would have under similar circumstances given their position with the company and level of responsibility. If no duty is owed then there is no negligence lawsuit. In this case they were all company executives and being paid while they used company time and money to plan and initiate a competing business.

Employees occupying a position of trust and confidence owe a duty of loyalty to their employer and must protect the interest of their employer although none of the four joint ventures were an officer of director of Chelsea, their position likely meant they were trusted executives and such they owed a fiduciary duty to Chelsea.

Therefore Chelsea would win. The damages would include lost profits, plus any monies Chelsea paid toward salary, travel, etc. that were used by the men to further their own business.CASE 39.9

Duty of Loyalty Ally is a member and a manager of a manager-managed limited liability company called Movers & You, LLC, a moving company. The main business of Movers & You, LLC, is moving large corporations from old office space to new office space in other buildings. After Ally has been a member-manager of Movers & You, LLC, for several years, she decides to join her friend Lana and form another LLC, called Lana & Me, LLC. This new LLC provides moving services that move large corporations from old office space to new office space. Ally becomes a member-manager of Lana & Me, LLC, while retaining her member-manager position at Movers & You, LLC. Ally does not disclose her new position at Lana & Me, LLC, to the other members or managers of Movers & You, LLC. Several years later, the other members of Movers & You, LLC, discover Allys other ownership and management position at Lana & Me, LLC. Movers & You, LLC, sues Ally to recover damages for her working for Lana & Me, LLC. Is Ally liable?Yes Ally is liable; she was competing with the corporation. She was part of another business that shows completion to the corporation Ally is part of. Ally did not mention this information to any of the managers at Movers & You.

It is mentioned that Ally was a member and a manager of a manager-managed limited liability company called Movers & You LLC. She later joined her friend Lana and forming another Lana &Me LLC, moving company.

According to the ULLCA 409(b), Ally had fiduciary duty of Loyalty and duty of care towards Movers & You LLC. In my opinion, Ally was liable to Movers & You LLC.Ally has been a member and manager with Movers & You LLC and at the same time shes been working Movers & You LLC. She started a new business with Lana, called Lana & Me LLC with her friend Lana. She did not let Movers & You, LLC know about her new position with Lana & Me LLC. She continued working with both the LLCs. The worst part of it is that she worked with both LLCs which are in the same kind of business. Moving large corporation from old locations to new locations. She did not follow the duty of Loyalty with Movers & You, LLC. She usurped the opportunities from Movers & You, LLC and competed with it. When the members found out about this, they sued Ally for the damages and she is liable for them.

Based on the concepts from the previous question, Ally would be liable as she owed a duty of loyalty to Movers & You, LLC and they could seek to recover damages including loss of profits directly attributable to Allys efforts at Lana & Me, LLC as well as the monies they spent on her during the time she was working on Lana & Me, LLC work. However, there may be a statute of limitations problem but the facts dont provide enough information to know, let alone whether this is a hypothetical case or an authentic case.

Reference

Chelsea Industries, Inc. v. Gaffney (29 Apr. 1983). Retrieved Apr. 12, 2013 from http://masscases.com/cases/sjc/389/389mass1.html

Gay v. Gay &s Super Markets, Inc. (13 Aug. 1975). Retrieved Apr. 10, 2013 from http://www.leagle.com/xmlResult.aspx?xmldoc=1975920343A2d577_1910.xml&docbase=CSLWAR1-1950-1985

Goodman v. Darden, Doman & Stafford Associates (20 Oct 1983). Retrieved Apr. 9, 2013 from http://www.leagle.com/xmlResult.aspx?xmldoc=1983576100Wn2d476_1533.xml&docbase=CSLWAR1-1950-1985