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MGMT 597 WEEK 6 HOMEWORK

DeANGELA DIXON

CASE 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