Shared Flashcard Set


Business Associations--Cases
BYU Scharffs

Additional Law Flashcards





Fenwick v. unemployment Compensation Comm'n, (N.J. 1945)


Guy makes sec. partner, but gives her no new powers

  • Rule: Just calling it a partnership doesn't make it one: Elements of whether a partnership exists:
    • intention of parties right to share profits--not dispositive
    • obligation to share in losses
    • ownership and control
    • power of administration l
    • anguage of agreement
    • conduct of parties toward 3rd persons
    • rights of parties on dissolution
  • Holding: Not a partnership, just a raise no risk, no control, dissolution like employment

Martin v. Peyton, (N.Y. 1927)


Martin (creditor to KNK bank) sues Peyton (other creditor of KNK) claiming Peyton had become a partner of KNK

  • Court asked if it was a debtor/creditor relaionship first--if had asked partnership first may have come out differently (but likely not)
  • Partnership factors:
    • get shares in company (collect dividends on securities from their loan $)
    • profit share
    • option to buy
    • equity interest
    •  inspect books
    • advised and consulted on important matters (veto power?)
    • Their friend Hall gets to run the partnership
    • Hall got letters of resignation from all partners and kept them safe
  • Loan factors
    • can't initiate transactions
    • things above look like provisions that might be in a loan
  • Holding: Not enough power to be a partnership, more like securing a loan. Only non creditor power was option to buy and that isn't enough to make a partner
Southex Exhibitions, Inc. v. Rhode Island Builders As'n, (1st Cir. 2002)
RIBA Ks w/ another home show company after K w/ Southex expires
  • Partnership by Estoppel--Southex wants it claimed for goodwill property
  • In determining whether a ptnersp exists look to totality of circumstances
    • joint property by itself isn't enough
    • profit sharing is prima facie evidence of ptnersp
  • Holding: Not a partnership.
    • Originally SEM didn't want a partnership but RIBA did.
    • Didn't call it a partnership in K (vague terms)

 Young v. Jones, (D.S.C. 1992)


Investors lose $ when bank goes under, sue accounting firm that said bank was safe, but to reach Price-Waterhouse Bahamas they sue Price-Waterhouse U.S. claiming partnership or partnership by estoppel

  • Partnership by Estoppel rule:
    • Default partnership rule: If 2 companies/individuals are not partners, then they not partners regarding liability to 3rd parties
    • BUT: if one holds himself out as a partner and a 3rd party relies on that then there is partnership by estoppel even if it gives liability to party that didn't hold himself out
  • Holding: no reliance here = no partnership by estoppel
This was especially complex because Young was claiming partnerships btwn two subsidiaries of PW-Int'l who really had no control over each other--should have argued apparent agency
Meinhard v. Salmon, (N.Y. 1928) (Cardozo)
Salmon (manager) didn't disclose deal re. property when ptnersp ended.
  • Clear holding: had duty to disclose
  • More strict language goes beyond duty of loyalty and encompasses duty to share: owes the punctilio of an honor the most sensitive
  • Corp. Opp. Doct. applies to ptnrshps too
  • Scharffs: complex, factually intensive inquiry if power is unequal more than disclosure may be required if can compete effectively notification would be sufficient to satisfy fiduciary duty of loyalty--especially if it is a term relationship
  • Also: closer new opportunity is to existing partnership activities the more likely duty will be stong Don't have to stay in a partnership--but some duty still exists, e.g. pay damages
Bane v. Ferguson, (7th Cir. 1989) (Posner)
After disastrous merger Bane loses pension
  • Law partners don't violate duty of care by agreeing to a catastrphic merger
  • Posner: former partners are owed no fiduciary duty
    •  this is harsh--some partner-like status due to pension
    • (Posner represents the minority rule) 
  • Business judgement rule: even if he were a partner, others are protected by business judgment rule
    • (unclear when bus. jdmt. applies to ptnrshps)
    • Counter-argument: don't have same interests--retired want low risk stuff, current partners want high risk, high yield interests
Meehan v. Shaughnessy (Mass. 1989)
Partners leave, talk to few associates, talk to one client, inform firm, send out letters to clients w/o telling firm who they are contacting
  • Rule: Fiduciaries can plan to compete
    • includes talking to partners/associates you want to take and any logistical preparation like leasing, preparing client lists.
  • Holding: approaching the one client was ok, but sending out letter w/ misleading information to clients and not informing firm who was getting it was breach of fid. duty.
  • Takeaway
  • Can talk to other partners about leaving
  • Can talk to associates/subordinates
  • Case gives mixed signals about talking to clients, but generally if firm doesn't know about it, is a violation of fid. duty (here it was limited and court said it was ok)
Lawlis v. Kightlinger & Gray,(Ind. App. 1990)
after overcoming alcoholism is expelled when he asks for his compensation to be re-adjusted
  • Employment at will = no fid. duties re. expulsion
  • Partnership agreement: employment at will
  • Consequently NO fiduciary duties--they contracted around them Duty of good faith survived (give him his partnership share--which they did)
  • Held: Wasn't expelled before the vote--still was able to vote.
    • No breach of fiduciary duty--agreement allows for at will expulsion and he signed it so he's bound by it.
    • No breach of good faith--tried to help him and believed they acted legally under agreement.
Putnam v. Shoaf, (Ct. App. of Tenn. 1981)
Negotiated to leave indebted ptnershp, later wants $ when they recover from embezzlement
  • Default rule: liable for partership acts for term you were partner
  • BUT here she negotiated to be shielded--got rid of ALL partnership interest, so she can't go after $ that was earned when she was a partner
  • Look to K to see if any rights were retained
  • Oil Hypo: wouldn't have paid for an oil spill, shouldn't recover for oil profits 
Remember: partners are entitled to their share of profits, not their share of the partnership property
NABISCO v. Stroud, (N.C. 1959)
Stroud wants Freeman to stop buying bread (50-50 partners) and says he won't be liable for it
  • A partner can't avoid being bound by agency acts of other partners.
  • Default Rules: UPA 18(e): Partners are agents to partnership and their actions can bind the company
  • UPA § 306 (1997) Partners are jointly and severally liable for all obligations unless otherwise agreed
    • contra UPA § 15 (1914) Partners jointly and severally liable for wrongful acts and breach of trust)
    • perhaps a different outcome under 1914 rule
  • All partners have equal rights unless agreement says otherwise
  • (majority rule--cannot unilaterally change partnership agreement)
  • Freeman was acting as agent and Stroud is bound/liable
    • Wasn't and couldn't have been a majority
Should have had a tie breaking mechanism in partnership or define a normal business decision (apparent agency wouldn't get around this?) or have an LLC
Summers v. Dooley, 481 P.2d 318 (ID 1971)
Garbage partners. Dooley hires someone to do his work. Summers wants a third worker. Dooley refuses and Summers hires someone anyway. Is Dooley bound?
  • Rule: each partner has equal rights in management (majority rule)
  • Held: Dooley not bound--continually objected
  • Options: dissolve partnership
  • Different from NABISCO because this is changing the status quo
Moren ex re. Morn v. Jax Restaurant (Minn. App. 2004)
son's hand mashed while mom (partner) is making pizza because cook didn't show. Partnership sues partner mom (insurance case)
  • Partnerships can't sue partners if they are acting in the normal course of business
  • UPA: Partnership may sue and be sued.
    • Is distinct from partners.
    • Is liable for actionable conduct of a partner acting in the ordinary course of business or w/ authority of the partnership.
  •  A partner has a right to indemnity from the partnership, but not vice versa.
  • Held: Was acting in the course of business = is indemnified.
Day v. Sidley & Austin, (D.D.C 1975) (affirmed D.C. Cir. 1976)
Day resigns after becoming co-chair--was promised before merger his position would stay the same.
  • Rule Fraud: must be deprived of a legal right in reliance of a false statement
  • Fiduciary Duty: Duty of full & fair disclosure.
  • Basic Fid. duties are
    • must account for profit acquired in manner injurious to partnership.
    • Can't acquire partnership asset or divert partnership opportunity
    • Can't compete w/ partnership w/i scope of business
  • Held:
    • No Fraud: Original partnership agreement doesn't say he'd keep top job in D.C. office.
    • No Fid. Duty: they didn't go behind his back re. secret profits or full/fair disclosure
  • Takeaway: you made your bed, now lie in it: if wanted position protected should have gotten it in K
    • Exec. committee always had all of the power--he isn't really out anything
Owen v. Cohen (Cal. 1941)
bowling alley w/ verbal partnership agreement, Owen puts 7k in, Cohen is worthless, Owen wants court to dissolve partnership
  • Rule from old UPA: Generally trifling and minor differences don't justify court dissolution of a partnership.
    • BUT, courts of equity can dissolve it if disagreements destroy all confidence and cooperation between the parties or one partner's actions materially hinder the business.
      • Overbearing and vexation petty treatment frequently is more serious in its disruptive character than would be larger differences. 
  • Holding: Parties were incapable of carrying on the business to their mutual advantage.
    • Dissolve partnership and Owen should get $ back.
Collins v. Lewis (Tx. App. 1955)
Cafeteria fiasco--Collins wants dissolution after sinking in too much money. Was owed 30k/yr from ptnrshp and claims Lewis is mismanaging.
  • Prev. Hist.: Jury found Lewis was competent to manage and there is a reasonable expectation of profit if Collins will just butt out.
  • Rule: Mere bad blood isn't enough to give a right to dissolution
  • Holding: Collins has no right to dissolve
    • Lewis is not mismanaging (pre. history)
    • Lewis took >$30k from ptnrshp to pay some startup costs that Collins was supposed to pay; so it's as if Collins was paid = Lewis hasn't breached agreement
Collins should just sit quietly and either get profit or wait for Lewis to breach agreement
Also, shouldn't have entered into an open-ended funding agreement w/ Lewis--always counsel against this
Page v. Page (Cal. 1961)
Linen business w/ new miliary base opening. Partner who put up all the money and hasn't been repaid wants to dissolve.
  • Holding: it is an at will partnership--agreeing to pay off debts to a partner doesn't mean it is a term partnership until the debts are paid
  • Dicta: If partner seeking dissolution easily wins bid due to $ owed and becomes sole owner there may be a cause for bad faith because business is going to start being profitable.
    • Shot across the bow
Prentiss v. Sheffel (AZ 1973)
3 partners of shopping center. Prentiss is behind on bills and only owns 15%. Others freeze him out of management and then dissolve partnership. Prentiss seeks declaratory jdmt that they can't bid on property because w/ their 85% ownership they wouldn't have to have much cash-in-hand to buy business.
  • For Prentiss' claim to be granted there must be a breach of good faith
  • Holding: There was no bad faith
    • they froze him out because he was behind on bills Bitter partner problem
    • he got more because they were interested bidders and likely drove his price up.
Disotell v. Stiltner (AK 2004)
Agree to convert property into hotel. Stiltner contributes property. Disotell is to contribute labor to same value as Stiltner's purchasing price. No written agreement. They disagree over who is to put up remaining cash--Stiltner only, or both 50-50.
  • Takeaway: work out the details and have a written partnership agreement!!!
  • Court allowed Stiltner to bid on property after dissolution, but requires that valuation be fair and Disotell's labor costs (though not done yet) NOT be considered partnership debt, but rather were a buy-in.

Pav Saver Corp. v. Vasso Corp. (Ill. App. 1986)


Paver case--Partnership agreement said could only be dissolved by both parties. One dissolves and the other wants the patents.


(I'm confused on this one. I may need to change the slide.)

  • Don't get patents back--were just good will. Vasso keeps them.
  • PSC entitled to value in partnership not including any good will (includes IP)
  • Concur & Dissent: Majority allows UPA to trump the partnership agreement regarding dissolution. This is wrong.
Kovacik v. Reed (Cal 1957)
Kitchen remodeling--Reed puts up $, Kovacik puts up labor. Split profits 50-50. Dissolve and debt of 8k on books. Is Kovacik liable for half?
  • OLD RULE (explicitly rejected in UPA)
    • Generally: presumption will share losses in same proportion as will share profits (50/50 here)
    • BUT: If one partner puts up $ and other puts up labor then neither party is liable to the other for contribution for any loss sustained. Each runs risk of losing his own capital ($ or labor)
  • Held: Kovacik isn't liable for $.
I like the policy behind this, but question its fairness. If Kovacik get profits for years and dissolves when there is some debt he shouldn't be able to walk away and make Reed pay all the debts. UPA 40(b) order of payment of partnership liabilities creditors not partners partner creditors each partner in respect to their capital
G&S Investments v. Belman (Ariz. App. 1984)
Appt. complex/cocaine--bum partner dies after dissolution action is filed. His family gets more under dissolution action than death under partnership agreement. They claim dissolution occurred with filing of suit
  • Dissolution doesn't occur w/ filing of action.
Jewel v. Boxer (Cal. App. 1984)
Law firm w/o partnership agreement dissolves: How are fees split over matters in existence when dissolution occurred?
  • Pre. History: quantum meruit: develops complex formula trying to be fair for who gets what
    • Doesn't consider parties' intentions or background law
  • RULE: UPA: Absent a contrary agreement, any income generated through the winding up of unfinished business is allocated to the former partners according to their respective interests in the partnership.
    •  Rejects quantum meruit
  • Parties can't just take valuable cases and run = fiduciary duty to wind up and complete the unfinished business of the dissolved partnership
Meehan v. Shaughnessy
covered earlier: lawyers leaving big--firm what can they do? This time the issue is how to divvy up work at dissolution
  • Rule under partnership agreement: Partners can remove a case they brought to the firm and pay a fee immediately to the firm and keep all subsequent profits. Get no pay for unfinished business that stays at the firm
    • (Basically is a leaving penalty)
    •  For wrongfully removed cases, must return all profits to the firm. Will keep what they would have kept while at the firm.
  • Meehan and Boyle have burden of proof that clients where they violated fid. duty would have gone with them anyway
  • This is much cleaner than the UPA rule because it makes a clean break. However, lawyers must have $ to pay penalties or else they can't get out and take clients.
  • Takeaway: negotiate the logistics of leaving when forming partnership--or at least know them.
Holzman v. De Escamilla (Cal. app. 1948)
Pre-RULPA case--Farm: Escamilla GP, 2 LP's. BK trustee sues to have them treated as GPs for debt liability
  • Rule: A limited partner becomes a general partner by taking part in the control of the business.
  • Held: Clearly took part in control:
    • the two of them could sign checks, and Escamilla couldn't by himself.
    • Vetoed certain crops and discussed all planting.
    • Demanded Escamilla resign as manager and hired new guy.
  • Would they be liable under RULPA?
    • Clearly satisfied the participation rule.
    • Creditors would have to show they knew they were acting as general partners
      • arguments:
      • checks had to be signed by one of them,
      • change of management,
      • seeing them act on the farm

Southern-gulf Marine Co. No. 9, Inc. v. Camcraft, Inc. (La. App. 1982)


Barret K's to buy boat as promoter of Camcraft TX Corp.(wasn't yet a corp.). Camcraft later incorporated as a Bahamas Corp. and notifies SgM. SgM defaults and tries to get out of liability saying it hadn't contracted w/ a corp because it wasn't in

  • 2 legal doctrines:
    •     De Facto corp. doctrine:a corp may treat something not properly incorporated as if it were if:
                1. tried to set it up and missed a technicality (organized in good faith)
                2. had a legal right to incorporate
                3. acted like it was
    •     Incorporation by estoppel:Person dealing w/ entity thought it was a corp all along and stands to get some windfall if corp. isn't recognized
    Held: Is estopped  from denying corp's existence.
        (Also remanded to see if transfer to Cayman Islands affected Camcraft's rights in any way)
        Policy: If Camcraft had defaulted, SgM would be seeking to enforce K.
    Note: Promoter is personally liable regardless of whether the corp is formed or not
        To avoid this need disclosure and agreement that she isn't liable.
Walkovsky v. Carlton (N.Y. 1966)
Several small cab corps are subsidiaries of big corp. Set up to make judgment proof. Walkovsky is injured and wants Carlton, sole shareholder of all corps, to be held personally liable claiming fraud.

Rule: Piercing the Corporate veil 2 step analysis
1. unity of interest: respect formalities/separate interests
2. Fraud/injustice/inequity (all things considered/all facts and circumstances: would a failure to pierce veil result in fraud/injustice)
 Held: Was no fraud: wasn't acting for himself, but for his larger corporation (?). (Was common practice under the law. 
Court also addresses agency, but it shouldn't because if shareholders were considered masters then the corp. veil would always be pierced
     Court avoids this by saying he wasn't pursuing    personal interests, just the corps.
Dissent: Carlton's corps are an abuse of the system: proposes public interest protectionist rule
Sea-land Services, Inc. v. Pepper Source (7th Cir. 1991)
Marchese owns several corps and is half-owners w/ Andre in Tie-on Corp. Defaults on payment to Sea-land, but Pepper Source is judgment proof. Sea-Land seeks to pierce corp. veil and then re-pierce it to reach other corps. (Not enterprise liability because corps aren't related)
Aggressive Piercing Case
Rule: Van Dorn Test--2 requirements
1. Unity of interest (4 factors:
  1. failure to maintain adequate corp. records or to comply w/ formalities
  2. commingling of funds or assets
  3. undercapitalization
  4. one corp. treating the assets of another corp. as its own.)
2. Fraud/injustice
Unfairness: some element of unfairness, something akin to fraud or deception or the existence of a compelling public interest must be present
    Must be more than merely avoiding collection
Held: 1st Prong satisfied. 2nd prong isn't clear enough--gives instruction on how to amend complaint which is done on remand
Court was likely hasty in including Tie-On--unfair to co-owner.
    Me: but, if it was run just like the others, then all funds would merely be moved to Tie-On.
Roman Catholic Archbishop of San Francisco v. Sheffield (Cal. App. 1971)
Sheffield sues San Fran Church, Pope, Vatican, and Swiss Monastery that ripped him off. Claims they're alter-egos, but it is unclear if he wants enterprise liability or reverse piercing--court treats it as reverse piercing (was easier)
2 step rule w/ factors (but are slightly different)
Held: Clearly no unity of interest.

In Re Silicone Gel Breast Implants Products Liability Litigation (N.D. Ala. 1995)
MEC is manufacturer and Bristol is sole shareholder. Bristol moves for summary jdmt.
1. Corp. Control (piercing)
     Gives big list of things that show control (basically was it bossing other corp around)
     Fraud: Many states don't require fraud if it is a tort claim (fraud is easier to prove in K than in tort)
2. Direct Liability: Duty can arise when an entity undertakes to perform some action that if care isn't taken can be expected to harm 3rd parties. (Negligence???)
Held: Denied Bristol's motion for sum. jdmt.
  Jury could find control and fraud from advertising
  Could find had held itself out = direct liability
Bristol could have protected itself by having:
    separate boards
    separate meetings
    separate books
Policy against liability: want to encourage big, responsible companies to take on unsafe products--otherwise only small, irresponsible companies will do so.
Frigidaire Sales Corp. v. Union Properties, Inc (Wash. 1977)
Commercial (LP)breaches K w/ Frigidaire who sues Union Corp. (general partner) and wants Mannon and Baxter (limited partners/sole shareholders of Union Corp.) held liable. Are limited partners liable if they are sole shareholders of general partner?
Rule: Cannot reach limited partners just because they are sole shareholders of general partner. If they follow the formalities and don't commit fraud they are shielded.

Held: unity of ownership isn't present--followed formalities of holding meetings, etc. When controlling commercial were acting as shareholders of Union Corp.
    No evidence of fraud--this is a legal tax scheme, not something to rip off others

Note: this isn't done any more because LLCs allow the same benefits w/o the complex formalities

Cohen v. Beneficial Industrial Loran Corp. (U.S. 1949)
Shareholder sues board. Before litigation ends NJ passes law saying shareholders who own <5% of stock or stock is <$50k must post security for derivative suits to cover defense litigation costs if suit is crap.
Issue: Does law violate due process?

States have plenary power to pass such laws

Eisenberg v. Flying Tiger Line, Inc. (2nd Cir. 1971)
FTL goes through complicated restructuring in order to have a subsidiary not governed by FAA. Shareholder sues claiming his vote was diluted because now the corp. he is shareholder of does nothing (is parent corp.)
Issue: Is this a direct or derivative suit? (Was dismissed for not posting bond required for derivative)

Rule: "If the gravamen of the complaint is injury to the corp. the suit is derivative, but if the injury is one to the plaintiff as a stockholder and to him individually and not to the corp. the suit is individual in nature and may take the form of a representative class action. "

Held: Vote was diluted = was a direct suit
    Rejects test from Gordon that basically makes all suits derivative

Grimes v. Donald (Del. 1996)
CEO compensation seems lavish. Shareholder sues.
  1. Direct /derivative rule: The distinction depends upon "the nature of the wrong alleged" and the relief, if any, which could result if P were to prevail.
  2. Demand is excused in derivative claims due to "futility of the demand" (Reasonable doubt  board is capable of making indep. decision)
    1. The exceptions are pretty open ended and flexible, e.g.
      1. maj. of bd has a material financial or familial interest
      2. maj. of bd is incapable of acting independently
      3. underlying transaction is not the product of valid exercise of bus. jdmt
  3. Wrongful refusal of a demand: (basically must overcome business judgment rule)
    1. There is a presumption that board acted w/i bus. jdmt rule UNLESS stockholder can allege facts w/ particularity creating a reasonable doubt that the board isn't entitled to presumption:
      1. show failure to exercise due care or board didn't act independently
  1. Abdication is a direct claim--no demand required
  2. This isn't enough to be abdication--board can still fire the CEO, pay him off, and then run the business
    1. Bus. Jdmt rule protects the board
  3. Demand: Once you've acknowledged need to demand, can't not make a demand on later claims.
    1. Majority of directors were not interested, so demand only partially excused
Marx v. Akers (Ny. 1996)
Shareholder doesn't make a demand on suit over executive pay because many of bd. members are interested
Issue: Was it proper to not make demand
NY RULE: ( Rejects Grimes reasonable doubt) Demand is excused because of futility when a complaint alleges w/ particularity that:
  • majority of board is interested in challenged transaction
  • board did not fully inform themselves
  • transaction was so egregious on its face that it couldn't have been sound bus. jdmt.
    Demand not excused for inside directors, but excused for outside directors (involved majority of board)
    Failed to state a claim on waste

Auerbach v. Bennett (NY 1979)
Gen. Tel. & Elec. conducts audit and learns it has been bribing foreign countries
  • P.H.: Auerbach (shareholder) files claim against bd. for failure of oversight. Bd. appoints 3 member special commtee of members that joined after conflict. They hire high caliber law firm to consult and conclude action is w/o merit. Intervenes and moves to dismiss--motion was granted. A different shareholder appeals.
  • Courts only investigate whether members of committee were disinterested and its methodology. Decision to create and cmtee's conclusion are covered by Bus. Jdmt.
  • Held: were disinterested and procedures were appropriate

Zapata Corp. v. Maldonado (De. 1981)
Derivative action w/o making demand for breach of fid. duties. 4 yrs later 2 new bd. members are appointed sp. lit. cmte. Recommend dismissal
New rule on whether a corp. special commtee can end a deriviative suit: 2 step test:
1. Was committee independent and act in good faith?
2. The court applies its own business judgment and makes a discretionary decision.
    i. Factors: ethical, commercial, promotional, public relations, employee relations, fiscal, legal
Policy: rule is middle ground between allowing corps to totally prevent derivative suits and allowing a lone shareholder to hold excessive power and bring strike suits that bind entire corp.
Remanded hinting suit should continue due to 4 yr time.

In re. Oracle Corp. Derivative Litigation (Del. trial ct. 2003)
Insider trading derivative action--2 Stanford Profs later join board and appointed as sp. lit. cmte. Recommend dismissal.
Note: not a direct suit even though shareholders were hurt because remedy is disgorgement and $ would go to the corp, not the shareholders
Focus on 1st prong of rule--impartiality
Held: Not enough to show w/o reasonable doubt that Profs weren't sufficiently disinterested
    Stanford University had a ton of connections w/ the corp--not all of which were disclosed. The profs also had personal connections w/ bd members.

A.P. Smith Mfg. Co. v. Barlow (NJ 1953)
derivative suit for making 1.5k donation to Princeton
As long as philantrhopic act serves the corp. interest in some way it is allowed. Board determines what is in their interest. (Bus. Jdmt.)
    Must be in good faith--Can't give to pet charities, and must be a reasonable amounts.
Policy: don't want one greedy shareholder stopping philanthropic acts

Dodge v. Ford Motor Co. (Mi. 1919)
Dodge Brothers sue over Ford's cutting dividends
Activist Court: If Corp. has money to pay to shareholders and it doesn't pay that can be bad faith
Held: Ford is running business like a charitable institution and forces him to pay dividends, but allows him to build a huge new plant.

Shlensky v. Wrigley (Ill. App. 1968)
Wrigley doesn't put lights up because of personal belief that baseball is a daytime sport
Bus. Jdmt Rule
Held: No showing of fraud, illegality, or dereliction of duty, or damages

Water, Waste & Land, Inc. D/B/A/ Westec. v. Lanham (Colo. 1998)
Lanham's LLC Ks w/ Westec Corp., but bus. card nor anything else indicated was an LLC. Lanham defaults and Westec wants to Lanham to be personally liable.
  • Note: an agent that enters a K is not personally liable for K
  • Broadly interprets statute of when a company is on notice it is dealing w/ an LLC: notice is given when company's name w/ LLC is given
    • Uses agency theory of undisclosed agent to reach this
  • Takeaway: have LLC on your business card

Elf Atochem North America, Inc. v. Jafari (Del. 1999)
Elf and Jafari form LLC that dictates CA law and mandates arbitration. Elf sues for breach of fiduciary duty in DE w/o arbitrating.
  • LLC give broad freedom to K, but parties are bound by the K they make as operating agreement.. Remember: LLC's can K around state rules and effectively make their own rules.
    • LLC's can define duties, but can't completely eliminate duties.
  • Must submit to arbitration

Kaycee Land and Livestock v. Flahive (Wy. 2002)
certified question: under WY law can corp. veil be pierced?
  • Won't declare a bright line rule that LLC veil can never be pierced.
  • Corp. stat. contemplates piercing and LLC is silent. So due to silence, can pierce
    • Is a stretch of an interpretation
NOTE: every state that allows piercing follows corp. piercing rules.
MN law: specifically allows LLC veil to be piercd.
WY case is an early case. General trend is for statutes to be more specific
  • Uniform LLC act:
    • failure to observe formalities isn't necessarily the way to pierce veil
    • implies piercing veil isn't necessarily just to look to corp. law.

McConnell v. Hunt Sports Enterprises (Ohio App. 1999)
LLC seeks NHL team in Ohio--Hunt refuses lease and McConnell forms different group and accepts it
  • Issue: Did Op. Agr. which allow competition w/ "any other" businesses allow McConnell to compete w/ LLC or did he violate fid. duty by competing?
  • Held: Fiduciary duty wasn't violated because Op. Agr. allowed
  • Takeaway: would have violated fiduciary duty, but they contracted around it in the op. agr.

New Horizons Supply Coop. v. Haack (Wis. Ap. 1999)
Haack dissolves LLC but doesn't pay creditor's first--says she will pay New Horizons and then doesn't
  • P.H. Was taxed like a partnership, is liable like a partnership. (Was small claims court--obviously way over the judge's head)\
  • Rule: (not from case) MUST wrap up an LLC when dissolved.
  • Held: is liable because didn't give notice of dissolution to creditors or file it. Can't just do it verbally.
Exception to rule of no liability because she broke rule that when you dissolve you have to pay creditor's first (are liable for everything you get).
    May have turned out differently if she showed she hadn't received anything when she dissolved, but she didn't


Kamin v. American Express Co. (NY TC 1976)


AMEX bought bad stock; rather than sell it at a loss give it as dividend. Lose 8m in tax savings; shareholder sues.

  • Bus. Jdmt: Must be a claim of fraud, bad faith, or oppressive conduct. If just a decision to pay dividends or do something else, that is covered by bus. jdmt.
    • Alleging an imprudent decision isn't enough.
    • Misjudgment, by itself, isn't actionable
  • Held: Board weighed both options and made a choice. No duty of care argument.
  • Duty of loyalty analysis: there were 4 inside directors who may have received a bigger bonus, but there were 16 outside directors who didn't get bonuses: so no duty of loyalty issue.
  • Takeaway: Duty of care isn't a duty to get it right--this was a bad decision, but not egregious to the point of giving liability.



Smith v. Van Gorkom (Del. 1985)


Class action by shareholders against Board of Directors of Trans Union Corp. Van Gorkom rams through leveraged buyout at $18/share premium.

In deal Pritzker demaned 1 million shares and no shop clause.

(Scharff's favorite case)

  • Rule: whether directors have informed themselves "prior to making a bus. decision, of all material information reasonably available to them."
    • Standard: Gross negligence
    • Absolute shield if relied on good faith report of expert or officer
  • Held: Breached duty of care
    • Didn't investigate other offers
    • Made decision in 2 hours
    • Approved amendments sight unseen
  • Van Gorkom just pulled # from air--need Fairness opinion (by expert investment banker)
  • Shareholder ratification doesn't cure breach of duty of care by board



Brehm v. Eisner (Del. 2000) (en banc)


Disney hires Ovitz away from job making 20m+; then fires him w/o cause, costing 140m


  • Issue: shareholders sue for good faith, abdication, loyalty, and waste (no duty of care due to 102(b)(7)).
    • Old board for agreeing to K,
    • New board for firing w/o cause
  • Held:
    • Duty to inform themselves of cost of firing (maybe liable)
    • Complaint doesn't show inappropriately relied on expert
    • No waste (CEO salary)
    • Complaint doesn't allege he resigned or could have been fired w/ cause
    • Decision to fire was bus. jdmt (possibly avoiding ugly litigation)
  • Aftermath:
    • Amended complaint to show no good faith effort to fulfill fid. duties
    • Bus. Jdmt still protected board--only redress is the market



In re The Walt Disney Co. Derivative Litigation (Del. 2006)


Last round reviewing lower court findings


Affirmed lower court on everything. In favor of Disney on duty of care, waste, abdication, and good faith.

Takeaway: Good faith rule

  • 3 activities that constitute bad faith
    • conduct motivated by subjective bad faith
      • (personal liability to directors)
    • gross negligence
      • (doesn't make directors personally liable)
    • conscious dereliction of duties
      • (personal liability to directors)
      • didn't happen because there was a delegation of duties




Francis v. United Jersey Bank (N.J. 1981)


Reinsurance co. Director dies and wife inherits. Sons take money on loan that should have been held in trust for clients. Trustee sues on behalf of creditors


  • Issue: Was wife liable to creditors for allowing sons to take $, even though she was old, depressed and pretty dysfunctional
  • Rule: in BK creditors leapfrog shareholders and thus become beneficiaries of duties
  • Fiduciary duties that apply:
    • rudimentary understanding of business of corp
    • not shut eyes of corp. misconduct
    • general monitoring of corp. affairs and policies
    • maintain familiarity of financial status of corp--not required to audit the books
    • Can rely on counsel/experts, but upon discovering illegal action must object
    • Knowing problems may give rise to duty to act further; If outvoted must do more--bring legal action, resign, etc.
    • DID NOT have to actually inspect or perform audits--just stay generally aware



In re. Caremark Int'l Inc. Derivative Litigation (Del. Ch. 1996)


Directors sued because employees were illegally giving kickbacks to Medi-recipients. Court must determine whether settlement is fair to shareholders.

  • Issue: Did directors violate duty of care by failing to adequately supervise employees/managers or by failing to institute corrective measures?
  • Rule:
    • The business jdmt rule is process oriented--not substantive
    • Directors can be held liable for violation of duty of good faith--this includes having an adequate information and reporting system
    • To breach duty of care by failing to control employees must:
      • know or should have known violations of law were occurring &
      • make no good faith effort to fix problems
      • such inaction was proximate cause losses
  • Held: settlement approved. NO showing they knew of problems before and when there is evidence they knew they took actions
    • Absent cause for suspicion, no duty to install and operate a corp. system of espionage to ferret out wrongdoing

Bayer v. Beran (NY. 1944)


Corp. sponsors radio singing program. Wife of CEO is a primary singer. Shareholders bring suit-- ad. campaign is just to serve wife.

  • Rule: Loyalty issues trump bus. jdmt rule
    • Bus. jdmt doesn't apply when there is a conflict of interest
    • Burden shifts to D and they must prove their decisoin was reasonable.
    • This court said decision must be "inherently fair" (high burden of proof)
  • Held: Was reasonable
    • Not holding a formal vote was ok--isn't fatal by itself
    • Had studies, hired radio consultant,  no evidence it was done just to help her career
  • Takaways:
    • If a conflict of interest = no bus. jdmt rule and burden shifts to prove act was reasonable.
    • Directors should have taken actions to be shielded from bus. jdmt. rule (formal vote w/ CEO recusing himself)



Benihana of Tokyo v. Benihana (De. 2006)


Benihana needs additional funds for renovations. Considers options and bd decides to issue convertible preferred stock. BOT makes deal to buy it. Benihana is a subsidiary of BOT--there is some issue over trying to take away voting power, but I don't understand it. (I think voting power was w/ kids who were trustees, and by selling to BOT the dad took back power???)

  • Issue: Disclosure and ramifications: Guy that negotiated deal (dad) never openly disclosed he was buying stock (disclosed his position) but everyone knew he was negotiating and everyone knew his position in BOT.
  • Rule: §144 De law gives safe harbor to interested transactions if (1) director's relationship to transaction is disclosed AND (2) majority of disinterested bd. members approve deal in good faith.
  • Held: Didn't expressly disclose position, but others knew of it, so disclosure was sufficient.
  • NOTE: in DE it is unclear if good faith stands alone as basis for director liability or if it is a sub-part of loyalty.
    • Clear that once bus. jdmt. doesn’t apply, good faith and duty of C are considered in determining if transaction was fair.

Lewis v. S.L. &E., Inc. (2nd Cir. 1980)


Tire co. & land co. owned by Dad. He distributes land to his kids w/ provision that in a few years the land co shareholders (all kids) not involved in the tire business must sell their shares to the others.

  • Issue: Brothers that run tire co don't re-up lease to market value--thus keep profits for themselves
  • Rule: Presumption of Bus. Jdmt. rule overcome if there is a conflict of interest
    • Remember: Bus. Jdmt doesn't even apply if there is a conflict of interest
    • Burden shifts to Ds to show reasonableness of actions
  • Held: never met their burden of proof
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