answer

July 1986, Question 5 [Torts] [Remedies]

Alice v. Bob

I. Negligence

1. Duty

Bob, as a bailee, owed a duty of care to Alice.

2. Breach

Bob failed to exercise reasonable care when he left the ring on the counter resulting in theft by Carl.

3. Causation

(1) Actual cause

It was the actual cause of the ring being stolen as but-for Bob's leaving the ring on the counter, it would not have been stolen.

(2) Proximate cause

It is also proximate cause because it is foreseeable that as a jeweler should know that a ring is a high value and easily taken away therefore susceptible for theft.

4. Damages

To recover damages, a P must usually establish causation, foreseeability, unavoidability, and certainty. Alice lost the ring.

5. Remedies

(1) Compensatory damage

Alice could recover the market value of the ring.

Alice v. Carl

I. Trespass to chattel

II. Conversion

III. Remedies

1. Compensatory damage

A compensatory damage puts P in the position she would have been in had defendant not breached.

2. Punitive damage

3. Constructive trust

4. Equitable lien

Alice v. Dan

I. Trespass to chattels

II. Conversion

III. Remedies

1. Compensatory damage

A compensatory damage puts P in the position she would have been in had defendant not breached.

2. Punitive damage

3. Replevin

4. Election of remedies

Business Association

1. Acquisition of Durmac Shares by Board

Power of Directors to Purchase Assets

The issue is whether Ennis' board acted within its power in purchasing the stock. The directors of a corporation have the absolute power to buy and sell assets on behalf of the corporation, and therefore Board acted within its powers in purchasing the Durmac stock. However, the remaining issue is whether the proper formalities were followed in voting to purchase the Durmac stock.

While no notice is required of general board meetings, reasonable notice is required of special meetings unless an express waiver is obtained. Here, notice of the special meeting was given to the four resident directors, but not to three of the nonresident directors. While Webster's signing of the waiver of notice at the conclusion of the meeting cures lack of notice as to him, no such waivers were obtained regarding the remaining two non-resident directors who did not receive notice. Thus, any action taken at the special meeting was invalid due to lack of proper notice to the two non-resident directors.

This issue is whether Ennis’ board acted within its power in purchasing the stock. The directors of a corporation have the absolute power to buy and sell assets on behalf of the corporation, and therefore, Board acted within its powers in purchasing the Durmac stock. However, the remaining issue is whether the proper formalities were followed in voting to purchase the Durmac stock.

Notice of Special Meeting Required

While no notice is required of general board meetings, reasonable notice is required of special meetings unless an express waiver is obtained. Here, notice of the special meeting was given to the four residential directors, but not to three of the nonresidential directors. While Webster’s signing of the waiver of notice at the conclusion of the meeting cures lack of notice as to him, no such waivers were obtained regarding the remaining two non-resident directors who did not receive notice. Thus, any action taken at the special meeting was invalid due to lack of proper notice to the two non-resident directors.

Voting at Meeting: Quorum/Proxy Issue

The next issue is whether the board’s action was supported by a quorum. Its bylaws establish a higher quorum, five out of seven, than an ordinary quorum, which requires only a simple majority. Modernly, higher quorum requirements established by the bylaws are followed and thus the board’s action is invalid because only four directors were present at the meeting. Grabes’ proxy, held by Chester, was ineffective, since a director may not vote by proxy. Thus, because no quorum existed, their decision to purchase the Durmac stock was invalid.

Ratification of Special Meeting

However, because the action of the board was later ratified by unanimous vote at the board’s regular meeting, attended by all directors, the action taken at the special meeting was validated by the board and cannot be set aside.

Thus, the acquisition of Durmac shares by Ennis was a proper corporate action.

2. Liability of Directors for Decline in Stock Value

A director must act with due care in carrying out corporate responsibilities and is liable for any damages arising out of a breach of this duty of due care to the corporation.

Here, there is no evidence that any of the Directors, with the exception of Almon, acted negligently in purchasing the Durmac shares. Ennis already owned a substantial interest in Durmac and sought to expand its holdings by purchasing additional shares of Durmac. Its purchase was "desirable" and therefore in the corporation's best interest.

While their actions caused a loss to the corporation when the Durmac shares declined sharply, the Directors are not liable for poor business decisions. Under the business judgment defense, directors are not liable for losses arising from a good faith business judgment executed with due care. Since there are no facts indicating that the Directors were motivated by self-serving interests or acted unreasonably in purchasing the shares, the directors will not be liable as a group for their decision.

However, Almon may be liable for breach of his duty of care if he voted to purchase the stock with knowledge that Ennis would incur losses, and could be held liable for the decline in value of the stock.

3. Almon's Liability for the Profits from the Sale of His Stock

Almon may be liable to the corporation for the profits received from his sale of Durmac stock based on three theories: Director's duty of loyalty, duty not to usurp corporate opportunity, and duty not to compete with the corporation.

Duty of Loyalty

A director breaches his duty of loyalty and fairness to the corporation when she puts her interest before that of the corporation. While it is unclear whether Almon knew that Durmac was preparing to purchase the stock from Starco before he purchased his shares, he should have at least disclosed his status as an interested director, since the purchase of such a large block stocks by Ennis would surely affect the value of the stocks he held.

Duty Not to Usurp Corporate Opportunity

Furthermore, the special offering of shares at $8.00 less the $50 price Ennis paid may have constituted a corporate opportunity. A director has a duty not to usurp a corporate opportunity to his personal benefit. Assuming that Almon knew that Ennis had an interest in those shares before he purchased them, he had a duty to give the corporation the opportunity to purchase those shares, since the corporation had the means to acquire. those shares at the reduced rate. Under this theory, a constructive trust may be imposed and Almon will be forced to disgorge any profits to the corporation for his breach.

Duty Not to Compete

Finally, Almon may have violated his duty not to complete with the corporation for the same reasons argued above. By purchasing stock which the corporation sought, Almon was in effect competing with the corporation in a corporate purchase of Stuck. although different shares were purchased, Almon still acted in a manner which was inconsistent with the corporation's interest. His purchase of shares for personal gain conflicted with his duty to act in the best interest of the corporation. Thus,Almon is liable to Ennis for any profits he made on the sale of the Durmac shares.