Question

Ed Klein was the sole shareholder, director, and chief executive officer of The Gun Exchange, Inc., a retail firearms dealership. The inventory of The Gun Exchange had been pledged as security for a $622,500 debt owed to InterFirst Bank. It also owed $231,484.60 to Sporting Goods, Inc.; this debt was unsecured. On May 20, InterFirst Bank notified Klein of its intention to foreclose on the inventory and sell it at public auction. InterFirst Bank further advised Klein that, pursuant to his personal guarantee, he would be responsible for any deficiency following the sale. Klein immediately incorporated The Gun Store, Inc., for the purpose of purchasing the assets of The Gun Exchange at the foreclosure sale. Before the foreclosure sale, Klein obtained a $650,000 line of credit from CharterBank on behalf of The Gun Store. At the sale, Klein purchased the assets of The Gun Exchange for $650,000 even though the highest prior bid was $175,000. (Had the $175,000 bid been accepted, Klein would have been personally liable for the deficiency to InterFirst Bank.)
After the foreclosure sale, no funds existed to pay the unsecured creditors of The Gun Exchange. Following the sale, The Gun Store began operating as a retail firearms dealer with the inventory purchased from the foreclosure sale. It operated in the same location and with the same personnel as The Gun Exchange. Sporting Goods, Inc., sued Klein individually for the $231,484.60. Klein contended that the corporate form under which he did business insulated him as a shareholder from liability for corporate obligations. Decide. Is it ethical to seek limited liability under the corporate form, as Klein did in this case? [Klein v. Sporting Goods, Inc., 772 S.W.2d 173 (Tex. Civ. App.)]



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  • CreatedJune 06, 2014
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