Lawsuit Against Law Firm: Breach of Fiduciary Duty and Embezzlement, Exams of Business Management and Analysis

Download Lawsuit Against Law Firm: Breach of Fiduciary Duty and Embezzlement and more Exams Business Management and Analysis in PDF only on Docsity! ID: Exam Name: BusAssoc_LS1_(Benedetto)_Final_F08 Instructor: Michele Benedetto Grade: ____________ 1) Part II: Essay Questions Essay #1 1. Andrea's (A) claims against the law firm A might try to sue the lawyer Charles (C) individually and his law firm for damages caused by C's embezzlement of the stocks and possibly not payment of dividends. A signed the Campbell's stocks to the C for "safekeeping" and C promised that C would pay dividends to A. It is unclear from the facts whether C distributed to A any dividends from the stock but considering all the circumstances - the fact that C was embezzling funds from the law firm and is in prison now, C most likely did not distribute any dividends to A and most likely sold her stock on the open market and took the money. A could try to sue C for the misappropriation of the stock and no payment of dividends but even if A is able to succeed, C has no assets so she would not able to able to collect her judgment against C. a. Agency law principles - employer/employee A's best course of action is to try to sue the law firm (the deep pocket D) in order to collect the price of the stock, the dividends that were not paid and possibly interest on the total amount. A could sue the law firm as C's employer. Under agency law, an employee is an agent for its employer - principal. Because a principal-agent relationship exists between C and the law firm and C is most likely not an independent contract (the law firm could exercise control over C in the means that he chose to complete his work as well as he was most likely working under the law firm's direction). If C was an idependent contractor, the law firm would not be liable for his actions. As an employee for the law firm, the law firm could be vicariously liable for C's actions if C acted within his scope of employment and had either apparent or actual authority. In this case he might have had both actual and apparent authority. When A asked to speak with the manager partner, she was told that he is not available and she could meet with the association. Thus, the law firm demonstrated to A as a 3rd person, that it has authorized C to act as an agent of the law firm. C had an apparent authority to consult A and B. Moreover, C most likely consented to and the law firm gave its consent to C's acting as the law firm's agent. Thus, C most likely also had actual authority to consult A and B. However, the law firm is only going to be liable if C acted within the scope of his employment - if he did something that was beoynd that scope, the law firm is not going to be liable because it did not authorize C to act outside his scope of employment (for actual authority) and A could not have reasonably believed that C was authorized to do such action that was outside his scope of his employment (for apparent authority) b. Not in the scope of business The courts have ruled differently when it comes to a lawyer acting outside the scope of his employment and outside the scope of the law firm's business. Some courts have found that when a lawyer took money from an old woman and promised to invest them and pay her dividents, that was outside of the law firm's business and the law firm could not be held liable for the lawyer's actions. Because the lawyer acted outside of the scope of what he was authorized to do for the law firm, the law firm was shielded from liability for the actions of the lawyer. c. Reasoanable person approach However, other courts have found that when a lawyer took money from a client in order to invest them, a reasonable person could have concluded that that was in the scope of what a law firm was allowed to do - consulting the client and taking care of his money, and thus the law firm was liable for the damages caused by the lawyer's actions. The law firm argued to no avail that it was not in the business of investing money for the client and it should not be liable. The courts protected the client's interested in those cases rather than the firm's interests. Depending which approach this court might decide to adhere to, the result might be different in a lawsuit against the law firm in order to recover the damages. If the court decides to follow the "not in the scope of business" approach - then A is probably not going to be able to prevail against the law firm. As the managing partner stated - the law firm did not do any securities work and C was not authorized to do any such work either. If the court takes the "reasonable person" approach - A has an argument that A reasonably believed that C could take her money and invest them as a part of his employment with the law firm. In that case, A might be successful in her lawsuit against the law firm. c. LLP - no personal liability The law firm's liability for C's wrongdoings might also depend on the business model of formation that it chose. If the law firm was formed an LLP, then the law firm might have a defense against paying for the associate's wrongdoing. In order for an LLP to be formed, the law firm has to comply with the statutory obligations - it has to be either a law firm, accountants or architects; needs to have an LLP at the end of its name; and need to file an application with the Secretary of State in order to be formed as an LLP. If the law firm did not do that, then it would be considered a general partnership (the default form) where there is no need for a written contract for the formation as long as two or more people get together to carry on the business for profit. A sharing in the profits in the partnership is not by itself enough to prove the formation of a general parternship but is a presumption for such formation. Another factor that has to be determined is the control that the partners exircised. If we assume that the law firm followed the requirements to become an LLP and is not a business damages, regardless of the fact that A works from home. This insurance would most likely not going to be considered a part of the business' capitalization. iii. Disregard of corporate formalities Another factor is the disregard of corporate formalities. There are no facts here that explain whether A and B as directors met, whether they kept minutes of the meetings and whether they paid dividents to the shareholders. There are also no facts as to whether A and B applied for a closely held corporation status under Sec. 7.32 of the MBCA. Their corporation is a good candidate for such status but needed to have selected such status in order to be relieved from the formalities - include it in the articles of incorporation. If theu did not, the court would most likely find that the company was not excluded to follow such formalities and those formalities were in fact not followed. iv. Fraud/misrepresentation If the corporation was created in Delaware, then the court there requires for a fraud or misrepresentation to be found in order to pierce the corporate veil. Here, there is unlikely for such fraud to exists - A did not try to commingle the funds and not follow the formalities in order to defraud the shareholders or the creditors. However, in other states this is just a factor and not dispositive. v. Large Salaries Paid to Directors; Insolvency of Debtor Corporations; Shareholder's personal guarantee of a loan The other factors that are usually considered are not existant here. Thus, they would weigh in favor of piercing the veil. Overall, considering the commingling of funds, the disregard of corporate formalities and the possible undercapitalization of the corporation, it is possible for the court to find that the veil could be pierced and A could be personally liable for the corporation's debts. 3. Betty's (B) Liability Exposure a. Watered Stock Liability B's water stock liability is similar to A's. b. Piercing The Corporate Veil B might not be liable personally for the debts of the corporation because she did not personally commingle funds, even though she was responsible for the decision making in the corporation, the lack of corporate formalities and the undercapitalization. It is debatable whether she would be personally liable but she has a good argument that she working under A's direction and should be liable for those debts. 4. David's (D) Liability Exposure a. No Watered Stock Liability D bought his shares for $5 which was exactly the amount of the par value of the stock - he is not going to have watered stock liability. b. No Personal Liability Even though D has a lot of money, he is not going to be liable for the debts of the company because he did not participating in the commingling of funds or in any other way in the corporation's business. He is a passive investor and the veil of the corporation is not going to be pierced against him. It is possible to only hold one shareholder personally liable for the liabilities of the corporation and for the corporation to continue its operation. Unfortuantely for E, he would not be able to recover against D. Essay #2 Molly's Shareholder proposal 1. Company registered under Sec. 12 of the Securities Exchange Act Because the Risk Bank's (C) stock is traded on the stock exchange, C needs to comply with the requirements of the act in relation with proxy solicitations and in this case, shareholder's proposals. Under Sec. 14, the Congress gave SEC the right to regulate this matter because of the involvement of stock sale in the interstate commerce. The shareholder proposal needs to comply with the requirements of the act as well. Needs to made by an eligble shareholder - who owns either 1% of the stock or $2000 worth of stock. Here, Molly (M) has 5% of the stock and could make such a proposal. Moreover, the proposal could not exceed 500 words and each shareholder has the right to make only one proposal per meeting. Such proposal needs to be included in the proxy solicitation, and C has the right to make a statement in connection with such proposal - there is no limitation on the number of words. Here, M qualifies to make such proposal. She holds the required number of stock and is only making one proposal. 2. Not within the subject matter However, there are some proposals that are prohibited from being made - including if there are against the law, duplicative, where the Board does not have the authority to decide such proposals or the shareholders is proposing something that is in the Board's discretion, etc. Here, the proposal is for making the dividends $5 per share. The shareholders are the owners of the corporation - as such they have the right to vote and to receive distributions, including dividends. The Board is managing the corporation - the Board has the right to determine salaries and the amount of the dividends. Because the Board usually has the right to determine the amount of the dividends, a shareholder could not take that right away from the Board (otherwide the shareholders will be managing the C and there would be no division between ownership and management). Because M's proposal seeks to determine the dividends - it is outsde the subject matter allowed for such proposals. The C has the right to exclude M's proposal for the annual meeting agenda. Demand for derivate suit for breach of fiduciary duty by F and the Board When shareholders decide to bring a derivative lawsuit against a director and the Board (suing the Board and the director on the C's behalf with all the damages going to the C's account), the shareholder might need to make a demand to the C. If they make a demand, they are admitting that their derivative lawsuit might not be viable - so some of the derivative suits go without making a demand as the demand would be futile. In that case, Ps need to give particularized facts in the complaint that the directors were not independent and the transaction would not have passed the BJR. If they are able to do that (without discovery), the court would allow the suit to continue without making a demand under Aronson. Here, we know that the transaction would most likely not going to pass the BJR and the directors are not so independent (they did not act in the best interest of the corp., F did self-dealing, as discussed below). Demand might indeed be futile and the shareholders could go on with the suit for breahc of fiduciary duty. If however, the court allows the suit to go on, the corporation under Zapata might need to form a SLC that coudl file a motion to dismiss the suit. Then the court would have the consider the indepdence, good faith and basis for the test of the SLC, as well as a second step - use it is own business judgment. If the SLC passes the test and in the court's business judgment, there is no merit to the case, the demand is excused and the C could deal with the problem internally instead of bringing an action to the court. In this case, D would bear the burden of proof. In case thet the demand is required, the court would allow the Board or the SLC to use it own business judgment to decide whether the issue needs to be decided internally or in the court, under the Zapata one part test. If the Board wants to keep the issue in the C, the court would allow that. The burden of proof in this case is on the P - the shareholders. In our case, because the transaction could not pass the BJR and the directors would most likely going to considered not independent and not acting in the best interest of the corporation, the shareholders could bring the lawsuit without making a demand and the demand would excused as futile. Viable claim against F for breach of fidiciary duty 1. No self-dealing under duty of loyalty F as a director of the Board has a duty of loyalty and duty of care towards the shareholders. When F signed a lease with the C for 10 years at a rate over 10% of the market value he engaged in self dealing and thus breached his duty of loyalty. The directors are not allowed to engage in self dealing, where self dealing is a transaction between the corporation and the director or his relatives for the benefit of the director or his relatives. Here, F singed a lease for his own building. Moreover, F knew that the rent was 10% over the market value and considering that the property is in Michigan, he most likely would not have been able to enter into a lease for such a high price has it not been his position as director of the corporation. F breached his duty of no self-dealing.