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ANSWERS TO PROBLEMS
1. After part of the shares of a proposed corporation had been successfully subscribed, the
promoter hired a carpenter to repair a building that was intended to be conveyed to the proposed
corporation. The promoter subsequently secured subscriptions to the balance of the shares and
completed the organization, but the corporation, finding the building to be unsuitable for its
purposes, declined to use the building or to pay the carpenter. The carpenter brought suit against
the corporation and the promoter for the amount that the promoter agreed would be paid to him.
Who, if anyone, is liable?
2. C. A. Nimocks was a promoter engaged in organizing the Times Printing Company. On
September 12, on behalf of the proposed corporation, he made a written contract with McArthur
for her services as comptroller for a one-year period beginning October 1. The Times Printing
Company was incorporated October 16, and on that date McArthur commenced her duties as
comptroller. Neither the board of directors nor any officer took formal action on her employment,
but all the shareholders, directors, and officers knew of the contract made by Nimocks. On
December 1, McArthur was discharged without cause.
a) Has she a cause of action against the Times Printing Company?
b) Has she a cause of action against Nimocks?
3. Todd and Elaine purchased for $300,000 a building that was used for manufacturing pianos.
Then, as promoters, they formed a new corporation and resold the building to the new
corporation for $500,000 worth of stock. After discovering the actual purchase price paid by the
promoters, the other shareholders desire to have $200,000 of the common stock canceled. Can
they succeed in this action?
4. Wayne signed a subscription agreement for one hundred shares of stock of the proposed ABC
Company, at a price of $18 per share in a State that has adopted the Revised Act. Two weeks
later, the company was incorporated. A certificate was duly tendered to Wayne, but he refused to
accept it. He was notified of all shareholders’ meetings, but he never attended. A dividend check
was sent to him, but he returned it. ABC Company brings a legal action against Wayne to recover
$1,800. He defends on the ground that his subscription agreement was an unaccepted offer, that
he had done nothing to ratify it, and that he was therefore not liable on it. Is he correct? Explain.
Answer: Subscribers. No, Wayne is not correct. Under the Revised Act, Wayne would be liable for
5. Julian, Cornelia, and Sheila petitioned for a corporate charter for the purpose of conducting a
retail shoe business. They complied with all the statutory provisions except having their charter
recorded. This was simply an oversight on their part, and they felt that they had fully complied
with the law. They operated the business for three years, after which time it became insolvent.
The creditors desire to hold the members personally and individually liable. May they do so?
Answer: Defective Incorporation. The law on the subject of individual liability where a corporation
has been defectively organized is not certain. Despite the legal formulas, the cases basically
attempt to strike a fair balance between the interests of the associates attempting to comply with
the law and the outside parties dealing with them.
(a) Common Law Approach. The corporation is not a corporation de jure. Filing of the articles
of incorporation with the Secretary of State is generally essential to corporate existence. Since
the articles were never filed, de jure existence is generally foreclosed.
Individual liability can be escaped if the corporation was a corporation de facto which requires
(1) the existence of a general corporation statute, (2) a bona fide attempt to comply with that law
6. Arthur, Barbara, Carl, and Debra decided to form a corporation for bottling and selling apple
cider. Arthur, Barbara, and Carl were to operate the business, while Debra was to supply the
necessary capital but was to have no voice in the management. They went to Jane, a lawyer, who
agreed to organize a corporation for them under the name A-B-C Inc., and paid her funds
sufficient to accomplish the incorporation. Jane promised that the corporation would definitely
be formed by May 3. On April 27, Arthur telephoned Jane to inquire how the incorporation was
progressing, and Jane said she had drafted the articles of incorporation and would send them to
the secretary of state that very day. She assured Arthur that incorporation would occur before
May 3.
Relying on Jane’s assurance, Arthur, with the approval of Barbara and Carl, on May 4 entered
into a written contract with Grower for his entire apple crop. The contract was executed by
Arthur on behalf of “A-B-C Inc.” Grower delivered the apples as agreed. Unknown to Arthur,
Barbara, Carl, Debra, or Grower, the articles of incorporation were never filed, through Jane’s
negligence. The business subsequently failed.
What are Grower's rights, if any, against Arthur, Barbara, Carl, and Debra as individuals?
Answer: Defective Incorporation. (a)Common Law Approach.
(1) A-B-C Inc. is not a corporation de jure. Filing of the articles of incorporation with the
Secretary of State is generally essential to corporate existence. Since the articles were never
filed, de jure existence is generally foreclosed.
(2) Individual liability can be escaped if A-B-C Inc. was a corporation de facto. The problem
corporation, and did not rely on the credit of individuals.
(3) Even if the requirements of de facto status are not met, Grower may be estopped from
questioning the valid incorporation of A-B-C Inc. since he dealt with the participants on a
corporate basis, as shown by the form of the contract. This area of law is based on considerations
of fairness, however, and the law attempts to balance social interests, including the protection of
7. The Pyro Corporation has outstanding 20,000 shares of common stock, of which 19,000 are
owned by Peter B. Arson; 500 shares are owned by Elizabeth Arson, his wife; and 500 shares are
owned by Joseph Q. Arson, his brother. These three individuals are the officers and directors of
the corporation. The Pyro Corporation obtained a $750,000 fire insurance policy to cover a
certain building it owned. Thereafter, Peter B. Arson set fire to the building, and it was totally
destroyed. Can the corporation recover from the fire insurance company on the $750,000 fire
insurance policy? Why?
8. A corporation is formed for the purpose of manufacturing, buying, selling, and dealing in drugs,
chemicals, and similar products. The corporation, under authority of its board of directors,
contracted to purchase the land and building it occupied as a factory and store. Collins, a
shareholder, sues in equity to restrain the corporation from completing the contract, claiming
that as the certificate of incorporation contained no provision authorizing the corporation to
purchase real estate, the contract was ultra vires. Can Collins prevent the contract from being
executed?
9. Amalgamated Corporation, organized under the laws of State S, sends several traveling
salespersons into State M to solicit orders, which are accepted only at the home office of
Amalgamated Corporation in State S. Riley, a resident of State M, places an order that is
accepted by Amalgamated Corporation in State S. The Corporation Act of State M provides that
“no foreign corporation transacting business in this state without a certificate of authority shall
be permitted to maintain an action in any court of this state until such corporation shall have
obtained a certificate of authority.” Riley fails to pay for the goods, and when Amalgamated
Corporation sues Riley in a court of State M, Riley defends on the ground that Amalgamated
Corporation does not possess a certificate of authority from State M. Result?
10. Dr. North, a surgeon practicing in Georgia, engaged an Arizona professional corporation
consisting of twenty lawyers to represent him in a dispute with a Georgia hospital. West, a
member of the law firm, flew to Atlanta and hired local counsel with Dr. North’s approval. West
represented Dr. North in two hearings before the hospital and in one court proceeding, as well as
negotiating a compromise between Dr. North and the hospital. The total bill for the law firm’s
travel costs and professional services was $21,000, but Dr. North refused to pay $6,000 of it. The
law firm brought an action against Dr. North for the balance owed. Dr. North argued that the
action should be dismissed because the law firm failed to register as a foreign corporation in
accordance with the Georgia Corporation Statute. Will the law firm be prevented from collecting
on the contract? Explain.
11. An Arkansas statute provides that if any foreign corporation authorized to do business in the
state should remove to the federal court any suit brought against it by an Arkansas citizen or
initiate any suit in the federal court against a local citizen, without the consent of the other party,
Arkansas’s secretary of state should revoke all authority of the corporation to do business in the
state. The Burke Construction Company, a Missouri corporation authorized to do business in
Arkansas, has brought a suit in federal court and has also removed to a federal court a state suit
brought against it. Burke now seeks to enjoin the Secretary of State from revoking its authority to
do business in Arkansas. Should the injunction be issued? Explain.
12. Little Switzerland Brewing Company was incorporated on January 28. On February 18, Ellison
and Oxley were made directors of the company after they purchased some stock. Then, on
September 25, Ellison and Oxley signed stock subscription agreements to purchase 5,000 shares
each. Under the agreement, they both issued a note that indicated that they would pay for the
stock “at their discretion.” Two years later in March, the board of directors passed a resolution
canceling the stock subscription agreements of Ellison and Oxley. The creditors of Little
Switzerland brought suit against Ellison and Oxley to recover the money owed under the
subscription agreements. Are Ellison and Oxley liable? Why?
(1973).
13. Oahe Enterprises was formed by the efforts of Emmick, who acted as a promoter and
contributed shares of Colonial Manors, Inc. (CM), stock in exchange for stock in Oahe. The CM
stock had been valued by CM’s directors for internal stock option purposes at $19 per share.
However, one month prior to Emmick’s incorporation of Oahe Enterprises, CM’s board reduced
the stock value to $9.50 per share. Although Emmick knew of this reduction before the meeting to
form Oahe Enterprises, he did not disclose this information to the Morrises, the other
shareholders of the new corporation. Can Oahe Enterprises recover the shortfall?
14. Healthwin-Midtown Convalescent Hospital, Inc. (Healthwin), was incorporated in California
for the purpose of operating a health-care facility. For three years thereafter, it participated as a
provider of services under the Federal Medicare Act and received periodic payments from the
U.S. Department of Health, Education and Welfare. Undisputed audits revealed that a series of
overpayments had been made to Healthwin. The United States brought an action to recover this
sum from the defendants, Healthwin and Israel Zide. Zide was a member of the board of directors
of Healthwin, the administrator of its health-care facility, its president, and owner of 50 percent
of its stock. Only Zide could sign the corporation’s checks without prior approval of another
corporate officer. Board meetings were not regularly held. In addition, Zide had a 50 percent
interest in a partnership that owned both the realty in which Healthwin’s health-care facility was
located and the furnishings used at that facility. Healthwin consistently had outstanding
liabilities in excess of $150,000, and its initial capitalization was only $10,000. Zide exercised
control over Healthwin, causing its finances to become inextricably intertwined with both his
personal finances and his other business holdings. The United States contends that the corporate
veil should be pierced and that Zide should be held personally liable for the Medicare
overpayments made to Healthwin. Is the United States correct in its assertion? Why?
Answer: Disregard of Corporateness: Closely Held. Judgment for the U.S. The corporate veil may
be pierced if (1) there is such unity of interest and ownership that the personalities of the
corporation and the individual no longer exist separately; and (2) if it would be inequitable to
15. MPL Leasing Corporation is a California corporation that provides financing plans to dealers
of Saxon Business Products. MPL invited Jay Johnson, a Saxon dealer in Alabama, to attend a
sales seminar in Atlanta. MPL and Johnson entered into an agreement under which Johnson was
to lease Saxon copiers with an option to buy. MPL shipped the equipment into Alabama and filed
a financing statement with the secretary of state. When Johnson became delinquent with his
payments to MPL, MPL brought an action against Johnson in an Alabama court. Johnson moved
to dismiss the action, claiming that MPL was not qualified to conduct business in Alabama and
was thus barred from enforcing its contract with Johnson in an Alabama court. Alabama law
prevents foreign corporations not qualified to do business in Alabama from enforcing their
intrastate contracts in the Alabama court system Is Johnson correct?
Answer: Foreign Corporations. Judgment for MPL affirmed. Alabama law prevents foreign
corporations not qualified to do business in Alabama from enforcing their contracts in the
16. In April, Cranson was asked to invest in a new business corporation that was about to be
created. He agreed to purchase stock and to become an officer and director. After his attorney
advised him that the corporation had been formed under the laws of Maryland, Cranson paid for
and received a stock certificate evidencing his ownership of shares. The business of the new
venture was conducted as if it were a corporation. Cranson was elected president, and he
conducted all of his corporate actions, including those with IBM, as an officer of the corporation.
At no time did he assume any personal obligation or pledge his individual credit to IBM. As a
result of an oversight of the attorney, of which Cranson was unaware, the certificate of
incorporation, which had been signed and acknowledged prior to May 1, was not filed until
November 24. Between May 1 and November 8, the “corporation” purchased eight computers
from IBM. The corporation made only partial payment. Can IBM hold Cranson personally liable
for the balance due?
Answer: Recognition of Corporateness. No, Cranson is not personally liable. The fundamental
question presented by the appeal was whether an officer of a defectively incorporated association
may be subjected to personal liability. Two doctrines have been used by the courts to clothe an
17. Berger was planning to produce a fashion show in Las Vegas. In April 1965, Berger entered into
a written licensing agreement with CBS Films, Inc., a wholly owned subsidiary of CBS, for
presentation of the show. In 1966, Stewart Cowley decided to produce a fashion show similar to
Berger’s and entered into a contract with CBS. CBS broadcast Cowley’s show, but not Berger’s;
and Berger brought this action against CBS to recover damages for breach of his contract with
CBS Films. Berger claimed that CBS was liable because CBS Films was not operated as a
separate entity , and that the court should disregard the parent-subsidiary form. In support of this
claim, Berger showed that CBS Films’ directors were employees of CBS, that CBS’s
organizational chart included CBS Films, and that all lines of employee authority from CBS
Films passed through CBS employees to the CBS chairman of the board. CBS, in turn, argued
that Berger had failed to justify piercing the corporate veil and disregarding the corporate
identity of CBS Films in order to hold CBS liable. Decision?
Answer: Disregard of Corporateness: Parent-Subsidiary. Judgment for CBS. Generally, a
corporation is a creature of the law, endowed with a personality separate and distinct from that of
its owners. A principal reason that legal recognition is given to the separate corporate personality
18. Frank McAnarney and Joseph Lemon entered into an agreement to promote a corporation to
engage in the manufacture of farm implements. Before the corporation was organized,
McAnarney and Lemon solicited subscriptions to the stock of the corporation and presented a
written agreement for the subscribers to sign. The agreement provided that the subscribers would
pay $100 per share for stock in the corporation in consideration of McAnarney and Lemon’s
agreement to organize the corporation and advance the preincorporation expenses. Thomas
Jordan signed the agreement, making application for one hundred shares of stock. After the
articles of incorporation had been filed with the Secretary of State but before the charter was
issued to the corporation, Jordan died. The administrator of Jordan’s estate notified McAnarney
and Lemon that the estate would not honor Jordan’s subscription.
After the formation of the corporation, Franklin Adams signed a subscription agreement making
application for one hundred shares of stock. Before the corporation accepted the subscription,
Adams informed the corporation that he was canceling it.
a Can the corporation enforce Jordan's stock subscription against Jordan's estate?
b Can the corporation enforce Adams's stock subscription?
Answer: Transfer of Securities.
(a) The corporation may recover from Jordan's estate. A subscription for shares of a corporation
to be organized is irrevocable for a period of six months unless provided otherwise by the terms
19. Green & Freedman Baking Company (Green & Freedman) was a family-owned Massachusetts
corporation that produced and sold baked goods. The terms of a collective bargaining agreement
required Green & Freedman Baking Company to make periodic payments on behalf of its
unionized drivers to the New England Teamsters and Baking Industry Health Benefits and
Insurance Fund (Health Fund). After sixty years of operation Green & Freedman experienced
financial difficulties and ceased to make the agreed-upon contributions. They mixed their own
finances with those of Green & Freedman's. The Elmans, through their domination of Green &
Freedman, caused the corporation to make payments to themselves and their relatives at a time
when the corporation was known to be failing and could be expected to default, or was already in
default, on its obligations to the Health Fund. It then transferred all remaining assets to a
successor entity named Boston Bakers, Inc. (Boston Bakers). Boston Bakers operated essentially
the same business as Green & Freedman until its demise two years later. The Health Fund sued
Green & Freedman, Boston Bakers, and the two corporations’ principals, Richard Elman and
Stanley Elman, to recover the payments owed by Green & Freedman with interest, costs, and
penalties. There was no evidence of financial self-dealing in the case of Boston Bakers. Both
corporate defendants conceded liability for the delinquent contributions owed by Green &
Freedman to the Health Fund. The suit against the Elmans was based on piercing the corporate
veil with respect to Green & Freedman and Boston Bakers. The Elmans, however, denied they
were personally liable for these corporate debts. Are the Elmans liable? Explain.
Answer: Piercing the Corporate Veil. The Elmans are not liable for the obligations of Green &
Freedman but are liable for the obligations of Boston Bakers. The legal standard for when it is
proper to pierce the corporate veil is not precise because it can vary according to the case
circumstances. Courts consider the respect paid by the shareholders themselves to the separate
20. Ronald Nadler was a resident of Maryland and the CEO of Glenmar Cinestate, Inc., a Maryland
corporation, as well as its principal stockholder. Glenmar leased certain space in the Westridge
Square Shopping Center, located in Frederick, Maryland, and in Cranberry Mall, located in
Westminster, Maryland. Tiller Construction Corporation and Nadler entered into two contracts
for the construction of movie theaters at these locations, one calling for Tiller to do the work for
Nadler at Westridge for $637,000, and the other for Tiller to do the work for Nadler at Cranberry
for $688,800. Ronald Nadler requested that Tiller send all bills to Glenmar, the lessee at both
shopping malls, but agreed to be personally liable to Tiller for the payment of both contracts. All
inventory was bought and paid for locally and Tiller paid sales tax in Maryland. Although there
was no formal office in the state, Tiller leased a motel room for a considerable period of time,
posted a sign at the job site, and maintained telephones listed in information. In addition, Tiller
engaged in fairly pervasive management functions, and the value of the projects comprised a
substantial part of Tiller’s revenues during the period. At the time of the suit, there was a net
balance due for the Cranberry project in the amount of $229,799.46, and on the Westridge
project for the sum of $264,273.85, which Nadler refused to pay, even though he had approved all
work and the work had been performed in a timely, good, and workmanlike manner. Tiller
Construction Corporation sued Ronald Nadler and Glenmar Cinestate, Inc., for breach of
contract. Nadler filed a motion to dismiss based on Maryland’s business corporation statute
which prohibits a foreign corporation that conducts intrastate business in Maryland from
maintaining a suit in Maryland courts if the corporation fails to register or qualify under
Maryland law. Nadler asserted that Tiller was a New York corporation that had never qualified to
transact business in the state of Maryland. Tiller conceded that the corporation had not qualified
to do business in Maryland but argued that Tiller was not required to qualify because its
activities did not constitute, in the contemplation of the statute, doing business in the state as
Tiller just had occasional business in Maryland. Discuss whether Tiller could bring suit in
Maryland.
Answer: Classification of Corporations/Domestic or Foreign. Under Maryland law a foreign
corporation is doing business within the state when it transacts some substantial part of its
ordinary business in that state, and it is forbidden from bringing suit in a Maryland court if it has
ANSWERS TO “TAKING SIDES” PROBLEMS
In May, Parr and Presba, while in the course of negotiations with Barker (a
salesperson for Quaker Hill) to purchase plants and owers, undertook to
organize a corporation to be named the Denver Memorial Nursery, Inc. On May
14 and 16, Parr signed two orders on behalf of Denver Memorial Nursery, Inc.
which, to the knowledge of Quaker Hill, was not yet formed, that fact being
noted in the contract. A down payment in the amount of $1,000 was made. The
corporation was not formed prior to entering into the contract because Quaker
Hill insisted that the deal be concluded at once since the growing season was
rapidly passing. Under the contract, the balance of the purchase price was not
due until the end of the year. The plants and owers were shipped immediately
and arrived on May 26. The Denver Memorial Nursery, Inc. was never formed.
Quaker Hill seeks to recover the unpaid balance of the purchase price from Parr
and Presba.
(a) What are the arguments that Parr and Presba are personally liable for the
unpaid balance?
(b) What are the arguments that Parr and Presba are not personally liable for
the unpaid balance?
(c) Explain who should prevail.
ANSWER:
(a) Quaker Hill would argue that promoters who enter a contract in the name
of a proposed corporation are personally liable in the absence of an
