Question
Deb and Jan were partners in the operation of a breakfast/lunch diner. Recent adverse decisions from the County Health Inspector relating to lapses in achieving
Deb and Jan were partners in the operation of a breakfast/lunch diner. Recent adverse decisions from the County Health Inspector relating to lapses in achieving proper water heating levels in their dishwashing system led to issuance of "B" or lower ratings being posted on the diner's front door and a general decline in business. Deb and Jan decided to convert their partnership into 2 Sisters' Café, Inc. ("Sisters"), a corporation, to limit their potential personal liability to any patrons who might become ill.
Deb and Jan each contributed $20,000 in cash to Sisters. In return, each received a $15,000 promissory note from Sisters and 5,000 shares of stock with a par value of $1 per share.
Prior to incorporation, Deb entered into a contract on behalf of Sisters with Equipment Company ("EC") for the unsecured credit purchase of a modern dishwasher for $100,000. EC was aware that Sisters had not yet been formed. EC delivered the dishwasher one week after incorporation, and Sisters used it thereafter and made monthly installment payments.
Sisters had been incorporated in compliance with all statutory requirements, and Deb and Jan observed all corporate formalities during the period of Sisters' existence. One year after incorporation, however, Sisters became insolvent and dissolved. At the time of the dissolution, Sisters' assets were valued at $50,000. Its debts totaled $120,000 consisting of the two $15,000 notes held by Deb and Jan and a $90,000 balance due EC for the dishwasher.
- As among EC, Deb, and Jan, how should Sisters' $50,000 in assets be distributed? Discuss fully.
- On what theories, if any, can Deb and Jan be held liable for the balance owed to EC? Discuss fully.
- On what theories, if any, can EC prevail against any other entity for the balance owed to EC? Discuss fully.
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1 Distribution of Sisters 50000 in Assets To determine how the assets should be distributed among EC Equipment Company Deb and Jan we need to look into the priority of claims in the event of corporate ...Get Instant Access to Expert-Tailored Solutions
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