EVIDENCE / CIVIL PROCEDURE
I. Dave's motion for a directed verdict was properly denied.
Dave moved for a directed verdict after Paul rested his case. In order for the motion to be granted, Dave would have to show that he is entitled to judgment as a matter of law - that no reasonable jury could examine Paul's evidence in its most favorable light and then conclude that Paul had established a prima facie case.
Paul has sued Dave for negligence. Paul wants to recover for personal injuries allegedly suffered while working out at Dave's Gym.
A. Duty and Breach: Res Ipsa Loquitur
Paul testified he sustained permanent injuries when Dave's weight lifting equipment broke. It is not unreasonable to conclude that his sort of accident ordinarily does not happen absent some negligence. Dave's Gym was at all times in control over the equipment. Paul testified that he was properly using the equipment at the time of his injury, and he also testified that he was injured.
Paul can thus establish Dave's breach of duty via res ipsa loquitur. B. Causation and Damages
Paul presented proper admissible medical evidence regarding his injuries. That evidence, combined with Paul's testimony about the events that allegedly occurred, would be enough for a jury to reasonably conclude that Dave's negligence was both the actual and proximate cause of Paul's injuries.
C. Conclusion
Paul's evidence, viewed in its most favorable light, establishes a prima facia case against Dave for negligence. The court properly denied Dave's motion for a directed verdict.
II. The fax was properly admitted. A. Relevance
Dave introduced into evidence a fax, allegedly from Paul, cancelling his membership to Dave's Gym
because he had been injured at work. This fax is relevant because it tends to disprove Paul's claim that his injuries were caused by Dave's negligence. The fax also suggests that Paul may have caused his own injuries by working out when she should not have been.
B. Objection #1: Authentication
Dave must offer evidence that the fax came from Paul. If Paul signed the document that was transmitted, his handwriting could be identified by an expert or by someone with personal knowledge of Paul's signature. If the document is unsigned, the fax may indicate which number the fax was sent from. This would be another way to authenticate the document.
C. Objection #2: Best Evidence
Dave is presenting a fax he received, as opposed to the original document that Paul transmitted. Under these circumstances, the fax will probably qualify as an original under the Federal Rules. It is the only version of the document in Dave's possession. Furthermore, it is an exact copy of what Paul allegedly transmitted. Assuming the document can be authenticated, it will survive a best evidence objection. California has a more liberal approach to the best evidence rule than the one used in the federal courts. Under the California rule, the fax will survive a best evidence objection.
D. Objection #3: Hearsay - Admission of a Party
The fax qualifies as an out of court statement by Paul, and it is being offered for its truth. It fits the traditional definition of hearsay, but the Federal Rules deem party admissions to be non-hearsay. Other jurisdictions would admit it as an exception to the hearsay rule.
III. The trainer's testimony was properly admitted. A. Relevance
William, the trainer, testified that he was in charge of Dave's Gym on the date in question, and that no one reported an accident to him. This is relevant because it casts doubt on Paul's story.
B. Objection: Hearsay - Business Records Exception
The absence of an injury report entry qualifies as hearsay. Still, the business records exception has been held to allow testimony about the absence of a record entry if under usual circumstances such a record ordinarily is kept. Assuming William would have made a record of an injury reported to him, his present testimony would survive a hearsay objection.
IV. The cross-examination of William was proper. A. Relevance
William was asked on cross-examination if he had written in a log book that someone was injured at the gym on the date of the accident. The question is relevant because an affirmative answer would cast doubt on William's testimony discussed in III above.
B. The question was permissible
An attorney is given considerable latitude to question a hostile witness. Since William has already testified that no one reported an accident to him on the date in question, Dave's counsel may question William about possible evidence of Paul's accident. This question is not leading, although leading questions are permitted on cross-examination. It is not unduly argumentative.
C. The jury instruction was incorrect.
The court indicated that William's answer could be considered for impeachment only. If William answered "no" to the question, Paul could impeach him with the entry, but the presence of an entry should also be admissible as substantive evidence. If William answered "yes," he could then authenticate the statement, which would qualify as substantive evidence as a business record.
V. Dave's motion for a mistrial probably should be granted.
One of the jurors inspected weight equipment at a nearby store during a break in deliberations, and reported the information obtained to the other jurors before a verdict was returned. Dave has moved for a mistrial.
A. The court should question the jurors.
It is forbidden for jurors to do their own investigations, independent of the trial. The parties have a right to a fair jury, one that relies on the evidence presented at trial and on the judge’s instructions. The facts presented suggest that Dave is not entitled to an automatic mistrial. The judge has the responsibility to question the jurors in order to determine the extent of any possible taint caused by the juror's misconduct.
B. The court may dismiss the juror or declare a mistrial.
If the jury has not been unduly tainted by the independent investigation of the single juror, the errant juror may be dismissed and replaced with an alternate. If the court determines that the taint is too serious to be mitigated by replacing a single juror, Dave's motion should be granted.
CRIMINAL LAW / PROFESSIONAL RESPONSIBILITY
I. Possible Criminal Liability of the Defendants A. Dan
1. Sale of heroin
Dan deals in heroin. He sells the drug to customers and his his messengers deliver it. Dan has no apparent defenses. He will be convicted of this charge.
2. Transportation of heroin
Dan apparently does not personally deliver the heroin he sells his customers. He does pay his messenger employees to deliver the drugs to his customers. Dan will face vicarious liability for the actions of Al, Bill and Craig, even if one or more of them escape criminal liability. Dan is guilty of transportation of heroin.
3. Conspiracy to transport heroin
Conspiracy requires an agreement between two or more people to commit a crime. As discussed below, Al knew he was participating in the heroin trade and was paid substantially more than standard messenger wages. Thus, Dan and Al worked together to violate the law. Dan is guilty of conspiracy to transport heroin.
B. Al
1. Sale of heroin
It is apparent that Al never exchanged money for drugs. Furthermore, Al never discussed the heroin sales with Dan, but Al has covertly inspected some packages and knew that many of them contained heroin. This means he was participating in a criminal conspiracy with Dan to distribute heroin. Al will be vicariously liable for Dan’s heroin sale. Al is guilty of sale of heroin.
2. Transportation of heroin
Al delivered packages he knew contained heroin. He has no defense to this charge.
3. Conspiracy to transport heroin
As discussed above, Al and Dan had a tacit agreement in which Dan sold heroin and Al delivered it. Al is guilty of conspiracy to transport heroin.
C. Bill
Bill did not know that the packages contained heroin. Bill suspected they did, but was indifferent to the content of the packages he delivers. Bill was paid standard messenger wages. Bill consulted with Lex, his lawyer, who did not advise Bill that he faced potential criminal charges. These facts are likely to absolve Bill from criminal liability, as discussed below.
1. Sale of heroin
Bill never sold heroin. Although he was suspicious about the content of the packages, he never profited from, nor did he know about, Dan’s heroin business. Lex, Bill’s lawyer, did not advise him that the package Lex inspected contained heroin and that Bill should quit working for Dan. Bill is innocent of this charge.
2. Transportation of heroin
Bill did deliver packages which contained heroin. At the same time, he did not know the packages contained heroin, and he was indifferent as to their content. He did not get paid extra for his work for Dan, unlike Al. Lex, Bill’s lawyer, did not advise him to quit working for Dan. Bill is innocent of this charge
3. Conspiracy to transport heroin
As discussed above, conspiracy requires an agreement between two or more people to commit a crime. Unlike Al, Bill never had any kind of understanding with Dan. Bill is innocent of this charge.
D. Craig
Craig was newly hired when he had an accident and a package containing heroin broke open. Craig is innocent of all charges, as discussed below.
1. Sale of heroin
Craig neither knew of nor suspected any illegality. He did not sell any heroin, nor was he aware of Dan’s illegal enterprise. Craig is innocent of this charge.
2. Transportation of heroin
Although Craig did transport at least one package that contained heroin, Craig neither knew nor suspected this fact. He is innocent of this charge.
3. Conspiracy to transport heroin
Craig had no idea that Dan was having his messengers deliver heroin. Craig was paid standard messenger wages. He did not agree with anybody to commit any crime. Craig is innocent.
II. Has Lex Violated Any Rules of Professional Conduct?
Bill asked Lex, his family lawyer, to inspect a suspicious package. Lex found heroin in the package and resealed it. All Lex did after that was give the package back to Bill, stating only: “What you don’t know won’t hurt you.” Lex’s conduct will subject him to professional discipline - and Lex may face criminal liability as well.
A. Duties to the Profession
Lex has a duty not to participate in criminal conduct. By resealing the package and returning it to Bill without telling Bill the package contained heroin, Lex became an accessory to heroin sales and transportation. Both the ABA Rules and Code and the California Rules state that a lawyer owes it to the profession not to engage in this kind of misconduct.
B. Duties to the Client
1. Lex has violated the duty of competence.
Lex did not perform his services competently. Bill came to Lex because he was worried about possibly being a participant in heroin sales and transportation. Had Lex been competent, he would have told Bill the package contained heroin, and Lex would have advised Bill to quit working for Dan. Competent advice would have protected Bill from being arrested and prosecuted. Lex will face professional discipline under both ABA and California standards of professional responsibility.
2. Lex has violated the duty of zealousness.
A lawyer must actively protect the interests of his client. By merely returning the package to Bill and telling him “What you don’t know won’t hurt you,” Lex knowingly exposed Bill to running the risk of being arrested and charged with serious felony crimes. Had Lex done the appropriate thing, namely tell Bill that the package in fact did contain heroin, and had Lex advised Bill to quit working for Dan immediately, Bill never would have gotten into trouble. Lex will be subject to discipline under both ABA and California standards for professional responsibility.
Wills Answer Outline
1. Validity of Tess' 2010 Will
Formal Will
The California Probate Code requires that a formal will must be in writing, signed by the testator (or by someone at the testator's direction), and signed by two persons as witnesses. The will must be signed by at least two persons each of whom are present at the same time. Both witnesses must also witness the signing of the will and understand that the instrument they signed is the testator's will. Here, Tess presumably was capable of executing her will. She evidenced her intent by her declaration to Wit that it was her will. The problem here then is whether Tess complied with the requirement of witness.
Witt's Signature
Witt was aware that the document he signed was Tess' will. Tess declared that the document Witt signed was her will and signed the will in Witt's presence. There is no requirement that the witness know the contents of the will, and thus Witt's signature is valid.
However, only Witt was present when Tess signed the will. Under California law, the signing by the testator or the testator's acknowledgement of his signature must occur in the joint presence of both witnesses. Because Ness, the second witness, was not present when Tess signed the will, the will is invalid.
Ness' Signature
As discussed above, Ness was not present when Tess signed the will, and the will is thus invalid. Ness did not understand that the document he signed was a will. Tess only told Ness to "witness this paper" and did not inform Ness that the document was a will. Thus, the will is invalid on this ground as well. Because Ness was not present when Tess signed the will and was not aware that the document he signed was a will, the will is invalid for want of the witnesses requirement.
Joint Presence of Witness
Under California law, the signing by the testator must occur in the joint presence of the witnesses. The 2010 will is thus invalid, as it was signed in the presence of only one of the two witnesses and Ness did not understand that the document was a will.
2. Validity of Tess' 2007 Will
Revocation of Wills
A valid will can be revoked by physical act, coupled with a simultaneous intention to revoke the instrument. The X's on the face of the will serve to cancel all material terms of the will. Although it is unclear who committed these acts, it can be inferred that it was done by Tess or at her direction from the will's location and the attempted execution of a new will, which also evidences Tess' intent to revoke the earlier will.
Dependent Relative Revocation
The doctrine of dependent relative revocation (DRR) applies when a testator revokes his will upon a mistaken belief that another disposition of property would be effective and but for this mistake would not have revoke the will. DRR, however, is not applied where to do so would defeat these testator's intent. Because Tess clearly intended Sam, with whom she had recently reconciled, to share in her estate, DRR does not apply.
Pretermitted Children
If DRR does apply, Sam cannot be protected as a pretermitted heir because he was alive at the time Tess executed her 2007 will.
3. Distribution of Tess' Estate
Interstate Succession
If the issue are all of equal degree of kinship to the decedent, they take equally. Thus, if DRR is not applied, Donna and Same take equally.
Sample Answer
1. Validity of Tess' 2010 Will
Tess' typewritten will was an attempt to create a formal will and thus must comply with the statutory requirements. The California Probate Code requires that a formal will be in writing, signed by the testator, or by someone at the testator's direction, and signed by at least two persons each of whom are present at the same time. Both witnesses must also witness the signing of the will by the testator and understand that the instrument they signed is the testator's will.
Here, Tess presumably was capable of executing her will. She evidenced her intent by her declaration to Wit that it was her will. The problem here then is whether Tess complied with the requirement of witnesses.
Wit's Signature
Wit was aware that the document he signed was Tess' will. Tess declared that the document Wit signed was her will and signed the will in Wit's presence. There is no requirement that the witness know the contents of the will, and thus Wit's signature is valid.
However, only Wit was present when Tess signed the will. Under California law, the signing by the testator or the testator's acknowledgement of his signature must occur in the joint presence of both witnesses. Because Ness, the second witness, was not present when Tess signed the will, the will is invalid.
Ness' Signature
As discussed above, Ness was not present when Tess signed the will, and the will is thus invalid.
Ness did not understand that the document he signed was a will. Tess only told Ness to "witness this paper" and did not inform Ness that the document was a will. Thus, the will is invalid on this ground as well. Because Ness was not present when Tess signed the will and was not aware that the document he signed was a will, the will is invalid for want of the witness requirement.
Validity of Tess’ 2007 Will
Revocation of the 2007 Will
The validity of Tess’ 2007 will depends on whether she effectively revoked the will. A will may be revoked by a physical act, accompanied simultaneously by an intent to revoke the instrument. The act of drawing a large “X” across all of the pages of the will serves to obliterate or cancel the will by physical act. The obliteration occurred on all material parts of the will and therefore constituted a complete cancellation of the will.
However, it is unclear who drew the X’s on the will, as the facts are silent as to whether Tess or a third party performed these acts. If Tess drew the X’s herself, the act of drawing the lines would sufficiently demonstrate her intent to revoke. Where the act of revocation is performed by a person other than the testator, the other person must act in the presence of the testator and at her direction. If these acts were committed by a third party, Tess must have been present at the time or instructed the third party to perform the acts constituting revocation. It is more likely that Tess herself drew the “X’s” on the will because the will was found in her safe deposit box with a new will that was substantially different. The X’s appeared only on the earlier will and not the later will, and this would sufficiently indicate Tess’ desire to revoke the 2007 will.
Thus, the 2007 will was revoked.
Dependent Relative Revocation
The doctrine of dependent relative revocation (DRR) applies where a testator revokes his will upon a mistaken belief that another disposition of his property would be effective and but for this mistake would not have revoked the will. Tess revoked the 2007 will upon her mistaken belief that the 2010 will was valid. DRR is applied as a tool by the courts to carry out the testator’s intent. The court will look at the consistency of the documents and may also consider the consequence of not applying DRR.
While both wills provide that the residue of Tess’ estate goes to Donna, the later will gives Tess’ Bigco stock to her son Sam instead of her friend Fred. Because her property would pass to Sam and Donna by intestate succession in the event that both wills were determined to be invalid, the court will probably not apply DRR. Here, it can be shown that Tess had recently reconciled with Sam and would have preferred that he share in her estate. Tess’ intent is evidenced by her devise to Sam in the new, but ineffective, 2010 will. Under these circumstances, DRR would defeat Tess’ intent and thus a court would not likely apply DRR.
In the unlikely event that a court did apply DRR, thus reviving the 2007 will and cutting out Sam, Sam could argue that he was a pretermitted heir. However, to be eligible as a pretermitted child in California, he must have been born or adopted after Tess executed her will. Here, Sam was alive at the time of execution and the pretermission argument would fail.
Distribution of Tess’ Estate
If DRR is applied to the 2007 will, the Bigco stock, valued at $400,000, will pass to Fred and the residue of the estate, the $600,000 in cash, will pass to Donna. As explained above, Sam would get nothing.
If DRR is not applied, then Tess’ estate passes through intestate succession. Under intestacy, Tess was survived by her two children, two each share one-half. Thus, the Bigco stock and $600,000 cash will be divided equally between Donna and Sam.
1996 Feb / Corporations-Remedies
ANSWER A TO QUESTION 2
1. Salesco's Rights and Remedies
A. Salesco v. Art: A promoter is liable in contract for any pre-incorporation contract
signed by the promoter. Art apparently executed the contract "on behalf of Widgco."
However, unless the promoter expressly limits his liability in the contract, merely
signing on behalf of future corporation is not sufficient to avoid liability.
The promoter is not liable if there is a complete novation. No such novation
occurred. Salesco could sue Art for breach of contract - due to the anticipatory
repudiation. Since the UCC would govern, Salesco has a duty to mitigate by
attempting resale of the goods. Salesco can then recover either 1) the difference
between resale price and contract price, or 2) the difference between contract price
and market price at the time of breach (assuming they choose not to resell). Since it
appears that these widgets are not unique, there is no grounds for specific
performance.
B. Salesco v. Widgco: The corporation is not liable for the contract of a promoter
unless 1) the corporation expressly ratifies the contract, or 2) impliedly ratifies the
contract (e.g. by accepting the benefit of the contract).
Bob and Cora, the other two directors, did not approve the contract, either in their
capacity as promoters or directors or shareholders. There has been no express
adoption of the contract.
The corporation never received the widgets. Although Salesco may argue that the
corporation received a benefit by getting a better buyer, this is not accepting the
benefit of the contract. The facts indicate the company flourished expressly
because they repudiated the contract. Although this may be an indication of bad
faith, it does not rise to the level of fraud or deceit, and Salesco has to pursue its
remedy against Art.
2. Widgco v. Bob: Bob subscribed to purchase 500 shares, but now refuses to
perform the contract and seeks to discharge his duties by giving Widgco a
promissory note.
A. Breach of Contract: A subscription agreement is an enforceable contract. If made
before incorporation, the contract matures upon incorporation. Bob signed the
agreement, and Widgco has now incorporated. He is liable for breach of contract if
he refuses to perform.
Bob may defend based on unconscionability, since the purchase price of $ 20 was
twice par value. But the court will not accept the quantity of consideration (so long
as above par value) as a valid defense.
Widgco is entitled to the full contract price.
B. Modification: Bob may argue he is offering adequate consideration to support the
original contract or a modification. It is inadequate to support the original contract (see above).
1996 Feb / Corporations-Remedies
Page 3 of 8
Whether Widgco can accept his promissory note as a valid K modification depends
on whether it is acceptable quality and quantity of consideration for stock.
Quality: A subscriber may pay cash, real property, or past services as consideration
for stocks. Although the law in this area is changing, generally a debt does not
satisfy consideration, unless the court finds it to be a promise to pay a sum certain.
Quantity: If the promissory note satisfies quality, it is unlikely to satisfy quantity.
However, if Bob intends to repay his entire contract obligation, the Board may
accept such payment, barring conflict of interest problems.
C. Duty of Loyalty: Widgco may sue Bob for breach of the duty of loyalty. As a
Director, Bob is now obligated not to place his interest in conflict with the interest of
the corporation. This duty includes the duty not to self-deal. The trier of facts would
have to examine the circumstances of the transaction. Does Bob really not have the
money, or is he changing the terms to benefit himself financially.
If the trier of facts finds that Bob is not acting in good faith and has breached his
duty of loyalty, Bob is personally liable to the corporation for any actions taken in his
capacity as director.
3. Cora's Rights and Remedies: Cora seeks to sell her shares to Dan, and if she
cannot do so, to block action against Bob or cause the dissolution of Widgco.
A. Sale to Dan: The subscription agreement contained a clause restricting any sale
(except to Widgco for $20) without approval of the other two shareholders.
Shareholders may validly restrict the transfer of shares as long as such restrictions
do not unreasonably restrict alienation. The right of first refusal is a reasonable
restriction. A subscription agreement would be binding on the shareholders.
Cora does have a valid defense, however, against the $20 price limit. Generally, the
right of first refusal requires purchase at market value. However, in this closely held
corporation, market value may be difficult to evaluate. Cora would have the burden
of showing (by appraising corporate worth) that the $20 price was patently unfair.
B. Blocking Action against Bob: As a director and officer, Cora owes a duty of
loyalty and care to the corporation.
Duty of Care: The duty of care requires Cora to act as a reasonably prudent person
in similar circumstances. If a reasonable person would conclude that taking action
against Bob is the prudent policy, Cora may be breaching her duty of care by trying
to block this action.
Duty of Loyalty: (see above for definition). The duty of loyalty also includes the
responsibility to avoid conflict of interest transactions or actions. Cora seeks to
block the action against Bob simply to preserve - gain leverage - for her personal
desire to sell her shares. There is no indication that this action would benefit the
corporation. By attempting to promote her interest to the possible detriment of the
corporation, she would breach her duty of loyalty.
Cora should not try to block action against Bob.
C. Dissolution: A director may not generally cause the dissolution of the corporation.
Cora could file a derivative suit in her capacity as shareholder to dissolve the
corporation. In order to do this, Cora must be a contemporaneous shareholder, must
petition the Board for action first (unless futile) and in some jurisdictions must post a
bond.
A shareholder can sue for dissolution only if the Board appears so deadlocked that they
cannot act, or the Board refuses to act. Cora's problem is that Art does not want her to
sell to Dan. The problem here seems to be that Bob, who has not paid for his shares,
should not be considered a valid shareholder (or director, for that matter). Since Cora
has 1500 shares, and Art 1000, and they are the only two shareholders, it is not clear
whether she can actually be blocked from selling. If Art can indeed block her based on
the transfer restriction agreement, Cora's best remedy is to challenge the price.
If Cora can show that between her and Art the Board is effectively deadlocked, she
could sue for dissolution. However, courts are reluctant to dissolve a profitable
corporation.
D. Suit against Art: Art apparently received his shares for future services 0" an invalid
quality of consideration for shares. Cora may have a claim that Art is not a valid
shareholder, thereby breaking the deadlock and solving her problems.
ANSWER B TO QUESTION 2
1. Salesco's Rights and Remedies
Salesco should try and collect under a breach of contract theory.
Salesco v. Art
Generally a promoter is liable on a valid pre-incorporation agreement. It appears that
this contract was validly formed and a writing was signed by Art so there should be no
statute of frauds problem. Widgco repudiated the contract and did not provide the
widgets as provided for in the agreement. This is a total breach of the contract and the
promoter is liable.
Novation
Art may claim he is not liable because there was a novation, i.e. a new agreement
between Salesco and Widgco, and Art is no longer liable. This argument will fail and Art
is still on the hook for breach of the pre-incorporation agreement.
Remedies
Salesco can sue for damages which would be the market or cover price less the contract
price. Thus, if Salesco has to pay more, which is likely because Widgco was able to sell
at a higher price than in the contract, Salesco can recover its damages from Art.
Salesco v. Widgco
Salesco may also sue Widgco for breach of contract. A corporation is generally not
liable for pre-incorporation agreements unless the corporation adopts the contract
or accepts the benefits under the contract. Widgco did not accept any benefits
under the contract because it was repudiated before any widgets or payments.
Did Widgco Adopt the Contract?
Bob and Cora knew of the agreement, but never approved it. In order to adopt the
contract, the corporation should take some sort of formal measures and sign a
resolution adopting the contract. Salesco will argue that because Bob and Cora
knew of the contract, and said nothing, it was adopted and the corporation is liable.
This argument should fail and the court should find the contract was not adopted by
the corporation.
Corporation by estoppel
Salesco might argue that it dealt with Widgco thinking it was a corporation, and Art
held it out as a corporation, and therefore the corporation should be bound under
the contract. Bob and Cora's knowledge of the contract does not make it unfair for
the corporation to be liable. This argument should fail because Salesco could have
found out if Widgco was incorporated and there were no defects or other reasons it
wasn't. This was just a pre-incorporation agreement. The corporation should not be
liable.
Remedies
If Widgco is liable, Salesco would be entitled to damages in the same amount that
Art is liable. Specific performance should not be available in either of these actions
because damages are an adequate legal remedy and can protect Salesco's
expectations.
2. Widgco's Rights and Remedies v. Bob
Widgco should attempt to enforce the subscription agreement against Bob. The
subscription agreement appears valid as it was signed by all parties.
Rescission
The corporation can rescind a subscription agreement if the party fails to perform.
Bob has failed to pay the $20/share agreed upon and Widgco should be able to
rescind the agreement as it relates to Bob.
Can Corporation Force Bob to Pay?
Generally, the corporation cannot force the shareholder to pay under the
subscription agreement and the only remedy will be rescission. Some jurisdictions
may allow the corporation to force Bob to pay, but most likely, Widgco will only be
able to rescind.
Defenses
Bob may try to argue that he was released from the agreement, or that there was
fraud involved. These arguments will fail because there was never a release and
the terms of the agreement were not fraudulent.
Bob's Offer to Give an Unsecured Note
Cash, property, and other items are proper consideration for shares of stock.
However, an unsecured note is not valid consideration and the corporation should
not accept that in lieu of the $20 called for in the subscription agreement. Even
though Bob agrees to pay interest the consideration is no good and he cannot claim
that is a fair substitute for the $20 a share.
Remedies
The corporation should be able to rescind the subscription agreement as it applies
to Bob.
3. Cora's Rights and Remedies
Invalid Transfer Restriction
Cora may argue that the subscription agreement is an invalid restraint on alienation
and cannot be enforced. Transfer restrictions are valid if they are reasonable and
appear on the face of the stock certificate.
Cora may argue that there was no restriction on the certificate. Bob and Art should
argue that the restriction is reasonable because this is a closely held corporation,
and it is important that control be maintained in a group that people get along with.
If the court agrees with Cora, the restriction will be held invalid as a violation of
policy and Cora could transfer the shares to Dan.
Cora v. Art for Breach of Shareholder's Duty
Shareholders in a closely held corporation owe a duty of good faith to one another
and a controlling shareholder cannot take advantage of another shareholder. Cora
should argue that Art has breached this duty by not allowing her to sell to Dan.
Art will argue that the agreement was valid and Cora must follow the terms of the agreement. Cora should lose in her argument because she cannot show Art has not acted in good faith given the agreement.
Derivative Suit
Cora may also bring a derivative action on behalf of the corporation arguing that the
corporation is damaged. This will fail because the corporation does not suffer any
damage in this sale between shareholders.
Dissolution
Cora may bring an action for involuntary dissolution arguing that there is deadlock
and oppression because she and Art cannot agree. Cora's threats to not take action
against Bob and Art's refusal to allow the sale of Cora's shares may be enough to
create deadlock. However, the court may be reluctant to order the dissolution
because the corporation has flourished financially.
Corporation v. Board or Cora v. Board
Cora may bring a derivative action on behalf of the corporation to enforce the
subscription agreement against Art and Bob. Art's future services are not valid
consideration for shares and therefore the corporation should rescind the
agreement with respect to Art. A demand on the Board would be futile because Art
and Bob are both members and have not paid for their shares.
Cora may prevail in a derivative action to rescind the agreement as it relates to Art and Bob.