A QUESTION OF ETHICS In 1990, American Design Properties, Inc ...

[V@ndy87]

A QUESTION OF ETHICS
  In 1990, American Design Properties, Inc (ADP), leased premises at 8604 Olive Boulevard in St. Louis County, Missouri. Under the lease agreement, ADP had the right to terminate the lease on 120 days' written notice, but it did not have the right to sublease the premises without the lessor's (landowner's) consent. ADP had no bank account, no employees, and no money. ADP had never filed an income tax return or held a directors' or shareholders' meeting. In fact, ADP's only business was to collect and pay the exact amount of rent due under the lease. American Design Group, Inc (ADG), a wholesale distributor of jewelry and other merchandise, actually occupied 8604 Olive Boulevard. J. H. Blum owned ADG and was an officer and director of both ADG and ADP. Blum's husband, Marvin, was an officer of ADG and signed the lease as an officer of ADP. Marvin's former son-in-law, Matthew Smith, was a salaried employee of ADG, an officer of ADG, and an officer and director of ADP. In 1995, Nusrala Four, Inc (later known as Real Estate Investors Four, Inc), purchased the property at 8604 Olive Boulevard and became the lessor. No one told Nusrala that ADG was the occupant of the premises leased by ADP. ADP continued to pay the rent until November 1998 when Smith paid with a check drawn on ADG's account. No more payments were made. On February 26, 1999, Marvin sent Nusrala a note that read, We have vacated the property at 8604 Olive, which, Nusrala discovered, had been damaged. Nusrala filed a suit in a Missouri state court against ADG and ADP, seeking payment for the damage. In view of these facts, consider the following questions.

Question 2

A check-out clerk at the grocery store is typically in a master-servant relationship, not an agency relationship.
 a. True
  b. False
  Indicate whether the statement is true or false

[Carissamariew]

Answer to Question 1

A QUESTION OF ETHICS
1. The court in this case defined situations in which one corporation shows such domination and control over another that the latter corporation becomes an adjunct or alter ego of the first. In such a situation, when the formal corporate separateness and the arrangements between the two corporations is devised or used to accomplish a fraud, injustice, or some unlawful purpose, then the separate formal corporate structures will be ignored. To pierce the corporate veil' and hold one corporation liable for the acts of another corporation, a plaintiff must show: 1) Control, . . . not only of finances, but of policy and business practice . . . ; and 2) Such control must have been used by the corporation to commit fraud or wrong, to perpetrate the violation of statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and 3) The control and breach of duty must proximately cause the injury or unjust loss complained of. To determine the degree of control, factors include the degree to which one corporation owns the stock of another, the two firms' capitalization, and the commonality and interrelation of their directors, officers, employees, property, and business. In this case, applying these factors, the court held that ADG controlled ADP, with respect to the lease, such that ADP had no separate mind, will, or existence of its own. The court also found fraud. ADG was the actual occupant of the property although it was not a party to the lease. ADP never told the lessor that ADG was the occupant or that a sublease had been made. The court explained that the lease was of commercial property to a lessee for the purpose of operating a . . . business thereon. Instead the lessee, which had the financial obligations under the lease, did not conduct the business. The occupant which conducted the business had no legal relationship with the lessor. As for the element of injury, the court noted that ADG created and maintained ADP in an insolvent condition for the sole purpose of being the named lessee of premises to be used by ADG. Since ADP was not the actual occupant of the premises conducting a business thereon, but was an insolvent shell, it could not pay its obligations under the lease upon default. Proximate cause was established.
2. ADG made this argument. The court held that this principle has questionable validity in a context involving the factors noted above and has no viability in the context of this case. In the first place, this case . . . represents an egregious situation. . . . The lessee was not even the actual occupant of the premises or conducting . . . business thereon but was merely a conduit for rent not engaged in any business. There was affirmative mis-representation, failure to disclose facts which required disclosure under the lease, and undis-closed breach of other lease provisions by which the controlling corporation, which was not the lessee, occupied the premises and carried on its own business thereon.

Answer to Question 2

TRUE

[V@ndy87]

TYSM

[matt95]

Excellent