Supply Chain Associates, LLC and Estream Solutions LLC are manufacturer’s representatives and
brokers that assist in the sale of electronic products. Their services were retained by ACT Electronics,
Inc., a corporation specializing in manufacturing electronic devices and components. ACT agreed to
pay Supply Chain and Estream commissions of 4 percent to 5 percent on sales brokered by them,
including a sale to buyer Bloomberg LP. When ACT failed to pay the commissions, Supply Chain and
Estream sued not only ACT, but also other business entities affiliated with ACT: Sun Act LLC, Sun
Capital Partners II LP, Sun Capital Advisors II LP, Sun Capital Partners LLC, Sun Capital Partners Inc.,
Sun Capital Advisors Inc., and Sun Capital Partners Management LLC. In the trial court, Supply Chain
and Estream argued that the veils between ACT and the other businesses should be pierced to make
them liable for the commissions that ACT failed to pay. ACT was a Delaware corporation based in
Massachusetts. From its incorporation in 2002 to its bankruptcy in 2008, ACT employed approximately
400 full-time and part-time employees who worked at one of its three manufacturing facilities. Sun Act
is a limited liability company and was ACT’s majority shareholder, owning 70 percent of ACT’s stock.
It also held the only voting shares of ACT. Sun Capital Partners II, a Delaware limited partnership, is
an investment firm that wholly owns Sun Act. Its limited partners include approximately 70 private and
public investors, including university endowments, pension funds, financial institutions, and individuals.
It provided Sun Act with capital to invest and obtain a majority shareholder interest in ACT. Sun Capital
Advisors II is the general partner of Sun Capital Partners II. Sun Capital Partners, LLC, is the general
partner of Sun Capital Advisors II. Sun Capital Partners Inc., a Florida corporation, is also a private
investment firm. Entities affiliated with Sun Capital Partners Inc. raise funds to invest in
underperforming or financially distressed companies. Supply Chain and Estream allege that Sun Capital
Partners Inc. is the de facto parent company of all the other defendants. The defendants counter that
there is no direct or indirect ownership or contractual relationship between Sun Capital Partners Inc.
and any other defendant or between Sun Capital Partners Inc. and ACT. Sun Capital Advisors Inc. is a
Florida corporation that also provides consulting and advisory services to companies. Sun Capital
Advisors Inc. entered into a Mastery Advisory Agreement with Sun Capital Management, contracting
to provide its services to various companies, including ACT.
Sun Capital Management, a Delaware limited liability company, provides consulting services to
companies. On July 2, 2002, Sun Capital Management and ACT entered into a Management Services
Agreement (MSA) by which Sun Capital Management would provide services to ACT’s senior
corporate management in exchange for an annual fee equal to the greater of $300,000 or 8 percent of
ACT’s EBITDA, that is, earnings before interest, taxes, dividends, and amortization. The Defendant
shareholders and affiliates of ACT asked the court to grant them summary judgment on the grounds that
ACT’s corporate veil may not be pierced to make the Defendants liable for the commissions ACT failed
to pay Supply Chain and Estream.
Kirpalani, Judge
There are 12 factors to consider in deciding whether to pierce the corporate veil: (1) common
ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management;
(4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7)
no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of
corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use
of the corporation for transactions of the dominant shareholders; (12) use of the corporation in
promoting fraud. Each of these factors will be considered in turn. (a) Common Ownership. In a veilpiercing case, courts first consider whether a corporation is operated as a separate entity. The
corporation is not operated as a separate entity where there is common control of a group of separate
corporations engaged in a single enterprise. Yet, common ownership of stock of two or more
corporations together with common management, standing alone, will not give rise to liability on the
part of one corporation for the acts of another corporation or its employees. It appears that Defendants
had some common control of ACT. For example, Sun Act owned 70% of ACT’s shares. Yet, Sun Act
was not in complete control of ACT; it still had a fiduciary duty to the nonvoting stockholders who held
30% of the shares. ACT had to deliver value to the buyers for which it manufactured products. In
addition, Congress Financial, ACT’s independent lender, approved ACT’s dividend declaration. This
suggests the entity that shared common control of ACT operated at arm’s length with ACT. Supply
Chain and Estream allege there was common control of ACT because some of the same people who
served on ACT’s Board were employed by Sun Capital or one of its related entities. Of particular
importance to Supply Chain and Estream is that when John M. Pino, Jr. [an ACT vice president]
informed Edward Duffy [the managing member of Estream] that ACT would not pay the commissions,
Mr. Terry and Rick Walter were Directors of ACT. Terry and Walter were also employees of one of the
related entities. Since the parties agree that Sun Act, Sun Capital Partners II, Sun Capital Advisors II,
Sun Capital Partners, LLC, Sun Capital Partners, Inc., and Sun Capital Management do not have
employees, the only Sun.
Capital entity that could have employed Terry and Walter at that time was Sun Capital Advisors,
Inc. Directors and officers, not employees, control companies. Terry and Walter, as Sun Capital Advisor,
Inc., employees, could not have controlled Sun Capital Advisors, Inc., and there was thus no common
control between Sun Capital Advisors, Inc., and ACT when ACT refused to pay the commissions. (b)
Pervasive Control. A court will find that a corporation has been pervasively controlled when one
corporation is carrying out tasks pursuant to another corporation’s command, or when one corporation
seeks permission from another before taking action on its own behalf. Courts consider whether the
controlled corporation had a separate mind, will, or existence of its own. There is no evidence that
Defendants ran ACT as its own candy store. ACT maintained its own headquarters, minute books,
accounting records, bank accounts, and budgets separate from Defendants. It also filed its own tax
returns. There is evidence that at one point, on January 22, 2003, John M. Pino, Sr., [an ACT board
member] and Joseph Driscoll [an ACT officer] listed their addresses in Florida at the same business
address as the Defendants. Other than this one incident in 2003, ACT and its Board members listed their
addresses in Hudson, Massachusetts where ACT was located. In addition, the MSA does not show that
Sun Capital Management pervasively controlled ACT. While Steven Liff [a vice president of both ACT
and Sun Capital Management and an employee of Sun Capital Advisors, Inc.] might have been on both
sides of the Management Sales Agreement [between ACT and Sun Capital Management], this was a
conventional management sales agreement, and was approved by Congress Financial, an independent
third-party lender. (c) Confused Intermingling of Business Activity Assets, or Management. With
respect to this factor, courts consider whether a business was clearly defined or whether there is a
confused intermingling of activity of two or more corporations engaged in a common enterprise with
substantial disregard of the separate nature of the corporate entities. See, e.g., George Hyman Const.
Co. v. Gateman, 16 F. Supp. 2d 129, 151 (1st Cir. 1998) (company engaged in confused intermingling
where used letterhead of one corporation in correspondence involving activity of another corporation
and where vendors were confused about which company they were dealing with). ACT maintained
separate headquarters, minute books, accounting records, bank accounts, and budgets from Defendants,
and ACT also filed its own tax returns. It is true that on January 22, 2003, ACT’s Board Meeting Minutes
reveal that Pino, Sr. and Driscoll listed their addresses in Florida, at the same business address as the
Defendants. Supply Chain and Estream do not claim that they, or vendors, were ever confused about
with whom they were dealing when they contracted with ACT. In fact, Sun Capital Partners, Inc., used
Sun Capital Partner, Inc.’s letterhead in its dealings with Bloomberg. ACT used its own letterhead in its
dealings with Bloomberg. Bloomberg also demanded buffer inventory from ACT; this shows
Bloomberg understood that ACT, and not Sun Capital Partners, Inc., would be held liable for ACT’s
actions if it breached the contract with Bloomberg.
(d) Thin Capitalization. This factor focuses on whether the initial capitalization of the company
was too thin. The Court considers the initial needs of the company, whether the company was given the
up-front financing needed to perform its work, and whether, during its active corporate life, the company
wanted for assets. In this case, ACT was initially capitalized with over $7 million in equity and debt.
ACT operated for six years after its initial capitalization, employing 400 full-time and part-time
employees working at one of its three different manufacturing facilities. These factors tend to show that,
based on the needs of the company, the initial capitalization was sufficient. Evans v. Multicon Const.
Corp., 30 Mass. App. Ct. [728,] at 734 [(1991)] ($500 was “unquestionably thin” but it was not “too
thin” based on the needs of the company); George Hyman Constr. Co., [v. Gateman] 16 F. Supp. 2d at
[129,] 153 [(1st Cir. 1998)] ($28,000 capitalization in loan “was thin, but not anorexic” and was “not
indicative of a company set up for financial failure”). (e) Nonobservance of Corporate Formalities. ACT
took care to observe the corporate formalities. Separate tax returns were meticulously filed. In addition,
throughout its years of activity in Massachusetts, ACT made routine filings with the Secretary of the
Commonwealth. (f) Absence of Corporate Records. ACT maintained its own corporate records, separate
and apart from any of the Defendants’ corporate records. Nothing in the record suggests that ACT’s
corporate records were ever either missing or fudged. (g) No Payment of Dividends. Corporations in
the normal course should be paying dividends, or at a minimum making conscious decisions not to do
so. In this case, ACT declared a dividend to its shareholders, which resulted in SunAct’s acquiring
$1.86millionand ACT’s other non-Defendant shareholders acquiring $1.14 million. There is nothing
unusual about the payment of dividends, especially where, as here, ACT retained in excess of $1 million
in cash, in addition to lines of credit, accounts receivable, and inventory. In addition, Congress Financial,
ACT’s independent lender, approved this distribution. (h) Insolvency at the Time of the Litigated
Transaction. The test for insolvency is whether the corporation, at any time while it was active,
experienced difficulty in paying debts as they became due. The time considered for the test of
insolvency is not a single point in time but rather the duration of the contested transactions between the
parties. In this case, the time period considered for this factor begins on January 14, 2003, when Supply
Chain entered into a Sales Representative Agreement with ACT. During ACT’s first year of existence,
ACT repaid all subordinated promissory notes outstanding to ACT’s investors in the amount of $3
million plus accrued interest. Congress Financial approved ACT’s repayment of these loans. There is
no evidence on the record, other than the extrajudicial statements Bloomberg and the ACT’s vendors
made to Duffy, that ACT experienced difficulty in paying debts as they became due. (i) Siphoning Away
of Corporate Assets by the Dominant Shareholders. To show that there was siphoning away of corporate
assets, there must be credible evidence ofsubterfuge or channeling excessive payments. This can be
shown through, for example, payments or dividends to officers, directors or stockholders or the Internal
Revenue Service challenging payments to officers or directors. Here, it is undisputed that, after the
dividend payment, ACT retained in excess of $1 million in cash in addition to lines of credit, accounts
receivable, and inventory, and that Congress Financial, ACT’s independent lender, was aware of, and
approved, ACT’s dividend payment. In addition, it is undisputed that the payment of management fees
made pursuant to the MSA were also approved by Congress Financial, and that these types of
agreements are common in the private equity industry. The IRS never challenged any of these payments.
(j) Non-functioning of Officers and Directors. This factor asks the court to consider whether the officers
and directors functioned actively. There is nothing in the summary judgment record to support that
ACT’s officers and directors were non-functioning.
(k) Use of the Corporation for Transactions of the Dominant Shareholders. The test here is whether
the Defendants used the corporation in aid of transactions in which they had substantial interest. ACT’s
one and only dividend distribution was recorded in the corporate records. The other transaction that
Supply Chain and Estream consider to be evidence of abuse of the corporate form was the payment of
management fees. These fees are not extravagant beyond any reasonable business usage, and, indeed,
were approved by Congress Financial, ACT’s third-party lender. Contra, George Hyman Constr. Co.,
16 F. Supp. 2d at 157 (transaction extravagant where shareholders purchased Ferrari and Mercedes for
their own use through corporation). (l) Use of the Corporation in Promoting Fraud. Finally, the court
considers whether there is any basis upon which to conclude that the corporation was used to perpetrate
a fraud. There is no such basis here. The record contains no evidence warranting a finding that ACT
was established or operated so as to misrepresent or divert assets. The facts that in the six years that it
operated, ACT employed 400 full-time and part-time employees located at one of its three
manufacturing facilities, and that ACT delivered value to its customers, suggest that ACT was
established to manufacture products, not to swindle sales representatives, like Supply Chain and
Estream, out of money. When determining whether to pierce the corporate veil, one examines the twelve
factors to form an opinion whether the overall structure and operation misleads. There is present in the
cases which have looked through the corporate form an element of dubious manipulation and
contrivance, finagling, such that corporate identities are confused and third parties cannot be quite
certain with what they are dealing.
Here, although Sun Act was a controlling shareholder of ACT, it did not own all of ACT’s stock. It
supplied ACT with some operating funds. ACT conducted some business that benefited the Defendants.
But here, separate corporate boundaries were maintained, and third parties did not think of themselves
as dealing with Sun Capital directly. Supply Chain and Estream in this case entered into a conventional
brokering sales arrangement with ACT, and were not misled into doing so on the belief it was doing
business with one of the Defendants.
In order to hold the Defendants liable for ACT’s conduct, ACT’s corporate veil must be pierced.
Defendants have shown that, as a matter of law, Supply Chain and Estream cannot establish that the
corporate veil should be pierced in this case, and therefore, the Defendants are entitled to summary
judgment.
I.
JUDGMENT
Synergies3 and DIRECTV shall not be liable for compensation. First of all, the
behavior of McLaughlin and Castro is personal and does not bring benefits to the
employer, nor is it something that the employer tacitly approves. There is no evidence
that the theft or conversion was for the benefit of Synergies3 or DIRECTV or to
promote their benefit. Synergies3 and DIRECTV have no direct or indirect
responsibility. McLaughlin and Castro should compensate Corvo and Bonds
separately.
LEGAL PRINCIPLE
A. Issue
Whether the court should rule on the employer when it is unaware of the personal behavior of
the employee?
B. Holding
No
III.
Reasoning
A. General Analysis
Corvo and Bonds sued McLaughlin, Castro, DIRECTV and Synergies3 Tec
Services. They believe that McLaughlin and Castro were stealing and conversions
with the acquiescence of their employers. But the actions of McLaughlin and
Castro were carried out without the employer’s knowledge and did not generate
benefits for DIRECTV and Synergies3. DIRECTV and Synergies3 should not be
held indirectly or directly responsible for the personal actions of McLaughlin and
Castro.
II.
B. Applied Analysis
When McLaughlin and Castro stole, it was their personal behavior. It was an act
that was carried out suddenly while doing work, and there was no plan. Moreover,
this violated the direct order of the employer and did not get the acquiescence of
the employer. They steal for their own benefit, but the employer will not profit
from the theft. Therefore, there is no indirect or joint liability.
IV.
JUDGMENT
McLaughlin and Castro should compensate Corvo and Bonds and be responsible for
the theft. This is their personal behavior. At the same time, they also violated the
contract signed with the employer. DIRECTV and Synergies3 do not need to pay
additional compensation for employees’ personal actions in breach of contract,
because they did not profit from this matter, so there is no indirect liability.
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
by
Robert S. Wiener
Problem solutions and examination essay answers are similar. Both call upon
you to apply legal principles to practical business situations. Your answers must set
forth reasons for conclusions stated. Organize and write them clearly using standardEnglish syntax and spelling. Include the area of law, parties, and legal issues. Include,
explain, and apply legal terms.
PROBLEM SOLUTIONS
Problem solving prepares you to write examination essays. Read the chapter and
assigned case opinions and write your case briefs. Then read the first assigned problem
a couple of times. Return to the text and analytically read the part of the chapter that
discusses the legal issue(s) raised in the problem. Keep an eye out for legal terms in
the problem. They are a key to the legal issue(s) and may appear in bold type in the
text. Read the problem again. You may want to make notes for your solution now — at
least, organize it in your mind. Do this without looking back at the text.
You are ready to write your problem solution. The advice given in “Cases and
Briefs” will help. For problems containing multiple questions, repeat the brief format writing your solution as an essay using separate paragraphs for separate sections. You do
not need to use headings. Leave space at the margins and between the sections of
your solution to revise it, for example, during/after classroom review.
The format for a problem solution and essay answer is a modification of your
brief format. It will generally look like this:
January 28, 211/28/21
1
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
I
JUDGMENT
II
A
B
LEGAL PRINCIPLE
ISSUE
(Question of Law)
HOLDING (Answer of Law)
A
B
REASONING
GENERAL ANALYSIS
APPLIED ANALYSIS
III
IV
JUDGMENT
I. JUDGMENT
In the first section, present your judgment. Omit the facts section. Copying facts
takes time with no benefit; however, you will refer to specific facts in your applied analysis section. Unlike briefs where you are asked to show your understanding of the
judge’s judgment, here you give your judgment (legal decision) based upon legal principles. Usually, in your problem solution you are called upon to judge a case, that is, to
decide who wins and explain why. If you are not yet clear on your judgment, leave this
section blank and return to it after you have written your reasoning sections.
II. LEGAL PRINCIPLE
Now your real work begins. In this section write the key legal principle guiding
your judgment, that is, your issue and holding. Merely writing the judgment is not
enough, even if it is correct. More importantly, you must explain your judgment. How
did you arrive at your conclusion?
!
1/28/21
2
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
I. REASONING
A. GENERAL ANALYSIS
This is General Analysis is the first part of your legal reasoning, your, including
the area of law. Elaborate on the issue and holding and discuss secondary legal issues.
This section should be fully developed, step-by-step, particularly for examination essays. You will base this on legal principles learned from reading the textbook, reading
and briefing cases, and class lecture and discussion.
B. APPLIED ANALYSIS
In Applied Analysis apply the general analysis to the problem’s relevant facts.
IV. JUDGMENT
Repeat your judgment to confirm that this is the legal decision to which your analysis leads. Has your judgment changed? If so, correct the judgment in your first section
so that both judgments match.
Problems and essay questions are often tricky. You may be unsure of the judgment. That is OK. There may be no clear answer. The correct answer usually earns only
10 points on an examination. And you may earn full credit for either of two different answers. Your objective is to convey that you have thought through the case from a business law perspective; therefore, the most important parts of your problem solutions and
essay answers are your legal principle and reasoning section.
How much time should this take? In order to be prepared to write well-organized
and thorough exam essays, for homework problem solutions, first read the relevant part
of the of textbook, then spend at least 20 minutes answering each problem.
January 28, 211/28/21
3
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
ESSAY ANSWERS
Essay answers are different from problem solutions in a few ways. Exams are
closed book and timed. You may have aout 40 minutes to answer an exam essay compared to 15-20 minutes on a CPA exam. First, read the question at the end of the essay. Next, use your case reading techniques to read the question’s facts several times.
Plan your answer before you begin writing. Crossing out and rewriting essay answers
wastes time. Exam questions are likely to be lengthier and more complicated than problems, with more facts and raising several legal issues rather than just one.
Grading of Essay Answers
Your grades on exam essay answers largely reflect your preparation. If you have
written your assignments (both case briefs and problem solutions), participated in class,
taken effective notes, and studied your assignments and notes well, reviewing them
soon after class, you should understand the legal principles and be able you to apply
them to new situations.
To earn more essay points, spot legal issues in essay questions. Then answer
those questions using legal terms to explain and apply relevant legal principles learned
in class. Basic terms, especially those written on the board, may earn credit if used appropriately and explained. A minimum of 120 points will be available for each exam; correct judgments earn 10 points. Sometimes, legal labeling of parties, for example, assignor and assignee in an assignment of rights contract case, will earn credit.
The better you prepare for exam essays by writing class assignments (and even
writing extra practice problem solution essays), the better you will perform on the exam
essays.
1/28/21
4
Purchase answer to see full
attachment
brokers that assist in the sale of electronic products. Their services were retained by ACT Electronics,
Inc., a corporation specializing in manufacturing electronic devices and components. ACT agreed to
pay Supply Chain and Estream commissions of 4 percent to 5 percent on sales brokered by them,
including a sale to buyer Bloomberg LP. When ACT failed to pay the commissions, Supply Chain and
Estream sued not only ACT, but also other business entities affiliated with ACT: Sun Act LLC, Sun
Capital Partners II LP, Sun Capital Advisors II LP, Sun Capital Partners LLC, Sun Capital Partners Inc.,
Sun Capital Advisors Inc., and Sun Capital Partners Management LLC. In the trial court, Supply Chain
and Estream argued that the veils between ACT and the other businesses should be pierced to make
them liable for the commissions that ACT failed to pay. ACT was a Delaware corporation based in
Massachusetts. From its incorporation in 2002 to its bankruptcy in 2008, ACT employed approximately
400 full-time and part-time employees who worked at one of its three manufacturing facilities. Sun Act
is a limited liability company and was ACT’s majority shareholder, owning 70 percent of ACT’s stock.
It also held the only voting shares of ACT. Sun Capital Partners II, a Delaware limited partnership, is
an investment firm that wholly owns Sun Act. Its limited partners include approximately 70 private and
public investors, including university endowments, pension funds, financial institutions, and individuals.
It provided Sun Act with capital to invest and obtain a majority shareholder interest in ACT. Sun Capital
Advisors II is the general partner of Sun Capital Partners II. Sun Capital Partners, LLC, is the general
partner of Sun Capital Advisors II. Sun Capital Partners Inc., a Florida corporation, is also a private
investment firm. Entities affiliated with Sun Capital Partners Inc. raise funds to invest in
underperforming or financially distressed companies. Supply Chain and Estream allege that Sun Capital
Partners Inc. is the de facto parent company of all the other defendants. The defendants counter that
there is no direct or indirect ownership or contractual relationship between Sun Capital Partners Inc.
and any other defendant or between Sun Capital Partners Inc. and ACT. Sun Capital Advisors Inc. is a
Florida corporation that also provides consulting and advisory services to companies. Sun Capital
Advisors Inc. entered into a Mastery Advisory Agreement with Sun Capital Management, contracting
to provide its services to various companies, including ACT.
Sun Capital Management, a Delaware limited liability company, provides consulting services to
companies. On July 2, 2002, Sun Capital Management and ACT entered into a Management Services
Agreement (MSA) by which Sun Capital Management would provide services to ACT’s senior
corporate management in exchange for an annual fee equal to the greater of $300,000 or 8 percent of
ACT’s EBITDA, that is, earnings before interest, taxes, dividends, and amortization. The Defendant
shareholders and affiliates of ACT asked the court to grant them summary judgment on the grounds that
ACT’s corporate veil may not be pierced to make the Defendants liable for the commissions ACT failed
to pay Supply Chain and Estream.
Kirpalani, Judge
There are 12 factors to consider in deciding whether to pierce the corporate veil: (1) common
ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management;
(4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7)
no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of
corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use
of the corporation for transactions of the dominant shareholders; (12) use of the corporation in
promoting fraud. Each of these factors will be considered in turn. (a) Common Ownership. In a veilpiercing case, courts first consider whether a corporation is operated as a separate entity. The
corporation is not operated as a separate entity where there is common control of a group of separate
corporations engaged in a single enterprise. Yet, common ownership of stock of two or more
corporations together with common management, standing alone, will not give rise to liability on the
part of one corporation for the acts of another corporation or its employees. It appears that Defendants
had some common control of ACT. For example, Sun Act owned 70% of ACT’s shares. Yet, Sun Act
was not in complete control of ACT; it still had a fiduciary duty to the nonvoting stockholders who held
30% of the shares. ACT had to deliver value to the buyers for which it manufactured products. In
addition, Congress Financial, ACT’s independent lender, approved ACT’s dividend declaration. This
suggests the entity that shared common control of ACT operated at arm’s length with ACT. Supply
Chain and Estream allege there was common control of ACT because some of the same people who
served on ACT’s Board were employed by Sun Capital or one of its related entities. Of particular
importance to Supply Chain and Estream is that when John M. Pino, Jr. [an ACT vice president]
informed Edward Duffy [the managing member of Estream] that ACT would not pay the commissions,
Mr. Terry and Rick Walter were Directors of ACT. Terry and Walter were also employees of one of the
related entities. Since the parties agree that Sun Act, Sun Capital Partners II, Sun Capital Advisors II,
Sun Capital Partners, LLC, Sun Capital Partners, Inc., and Sun Capital Management do not have
employees, the only Sun.
Capital entity that could have employed Terry and Walter at that time was Sun Capital Advisors,
Inc. Directors and officers, not employees, control companies. Terry and Walter, as Sun Capital Advisor,
Inc., employees, could not have controlled Sun Capital Advisors, Inc., and there was thus no common
control between Sun Capital Advisors, Inc., and ACT when ACT refused to pay the commissions. (b)
Pervasive Control. A court will find that a corporation has been pervasively controlled when one
corporation is carrying out tasks pursuant to another corporation’s command, or when one corporation
seeks permission from another before taking action on its own behalf. Courts consider whether the
controlled corporation had a separate mind, will, or existence of its own. There is no evidence that
Defendants ran ACT as its own candy store. ACT maintained its own headquarters, minute books,
accounting records, bank accounts, and budgets separate from Defendants. It also filed its own tax
returns. There is evidence that at one point, on January 22, 2003, John M. Pino, Sr., [an ACT board
member] and Joseph Driscoll [an ACT officer] listed their addresses in Florida at the same business
address as the Defendants. Other than this one incident in 2003, ACT and its Board members listed their
addresses in Hudson, Massachusetts where ACT was located. In addition, the MSA does not show that
Sun Capital Management pervasively controlled ACT. While Steven Liff [a vice president of both ACT
and Sun Capital Management and an employee of Sun Capital Advisors, Inc.] might have been on both
sides of the Management Sales Agreement [between ACT and Sun Capital Management], this was a
conventional management sales agreement, and was approved by Congress Financial, an independent
third-party lender. (c) Confused Intermingling of Business Activity Assets, or Management. With
respect to this factor, courts consider whether a business was clearly defined or whether there is a
confused intermingling of activity of two or more corporations engaged in a common enterprise with
substantial disregard of the separate nature of the corporate entities. See, e.g., George Hyman Const.
Co. v. Gateman, 16 F. Supp. 2d 129, 151 (1st Cir. 1998) (company engaged in confused intermingling
where used letterhead of one corporation in correspondence involving activity of another corporation
and where vendors were confused about which company they were dealing with). ACT maintained
separate headquarters, minute books, accounting records, bank accounts, and budgets from Defendants,
and ACT also filed its own tax returns. It is true that on January 22, 2003, ACT’s Board Meeting Minutes
reveal that Pino, Sr. and Driscoll listed their addresses in Florida, at the same business address as the
Defendants. Supply Chain and Estream do not claim that they, or vendors, were ever confused about
with whom they were dealing when they contracted with ACT. In fact, Sun Capital Partners, Inc., used
Sun Capital Partner, Inc.’s letterhead in its dealings with Bloomberg. ACT used its own letterhead in its
dealings with Bloomberg. Bloomberg also demanded buffer inventory from ACT; this shows
Bloomberg understood that ACT, and not Sun Capital Partners, Inc., would be held liable for ACT’s
actions if it breached the contract with Bloomberg.
(d) Thin Capitalization. This factor focuses on whether the initial capitalization of the company
was too thin. The Court considers the initial needs of the company, whether the company was given the
up-front financing needed to perform its work, and whether, during its active corporate life, the company
wanted for assets. In this case, ACT was initially capitalized with over $7 million in equity and debt.
ACT operated for six years after its initial capitalization, employing 400 full-time and part-time
employees working at one of its three different manufacturing facilities. These factors tend to show that,
based on the needs of the company, the initial capitalization was sufficient. Evans v. Multicon Const.
Corp., 30 Mass. App. Ct. [728,] at 734 [(1991)] ($500 was “unquestionably thin” but it was not “too
thin” based on the needs of the company); George Hyman Constr. Co., [v. Gateman] 16 F. Supp. 2d at
[129,] 153 [(1st Cir. 1998)] ($28,000 capitalization in loan “was thin, but not anorexic” and was “not
indicative of a company set up for financial failure”). (e) Nonobservance of Corporate Formalities. ACT
took care to observe the corporate formalities. Separate tax returns were meticulously filed. In addition,
throughout its years of activity in Massachusetts, ACT made routine filings with the Secretary of the
Commonwealth. (f) Absence of Corporate Records. ACT maintained its own corporate records, separate
and apart from any of the Defendants’ corporate records. Nothing in the record suggests that ACT’s
corporate records were ever either missing or fudged. (g) No Payment of Dividends. Corporations in
the normal course should be paying dividends, or at a minimum making conscious decisions not to do
so. In this case, ACT declared a dividend to its shareholders, which resulted in SunAct’s acquiring
$1.86millionand ACT’s other non-Defendant shareholders acquiring $1.14 million. There is nothing
unusual about the payment of dividends, especially where, as here, ACT retained in excess of $1 million
in cash, in addition to lines of credit, accounts receivable, and inventory. In addition, Congress Financial,
ACT’s independent lender, approved this distribution. (h) Insolvency at the Time of the Litigated
Transaction. The test for insolvency is whether the corporation, at any time while it was active,
experienced difficulty in paying debts as they became due. The time considered for the test of
insolvency is not a single point in time but rather the duration of the contested transactions between the
parties. In this case, the time period considered for this factor begins on January 14, 2003, when Supply
Chain entered into a Sales Representative Agreement with ACT. During ACT’s first year of existence,
ACT repaid all subordinated promissory notes outstanding to ACT’s investors in the amount of $3
million plus accrued interest. Congress Financial approved ACT’s repayment of these loans. There is
no evidence on the record, other than the extrajudicial statements Bloomberg and the ACT’s vendors
made to Duffy, that ACT experienced difficulty in paying debts as they became due. (i) Siphoning Away
of Corporate Assets by the Dominant Shareholders. To show that there was siphoning away of corporate
assets, there must be credible evidence ofsubterfuge or channeling excessive payments. This can be
shown through, for example, payments or dividends to officers, directors or stockholders or the Internal
Revenue Service challenging payments to officers or directors. Here, it is undisputed that, after the
dividend payment, ACT retained in excess of $1 million in cash in addition to lines of credit, accounts
receivable, and inventory, and that Congress Financial, ACT’s independent lender, was aware of, and
approved, ACT’s dividend payment. In addition, it is undisputed that the payment of management fees
made pursuant to the MSA were also approved by Congress Financial, and that these types of
agreements are common in the private equity industry. The IRS never challenged any of these payments.
(j) Non-functioning of Officers and Directors. This factor asks the court to consider whether the officers
and directors functioned actively. There is nothing in the summary judgment record to support that
ACT’s officers and directors were non-functioning.
(k) Use of the Corporation for Transactions of the Dominant Shareholders. The test here is whether
the Defendants used the corporation in aid of transactions in which they had substantial interest. ACT’s
one and only dividend distribution was recorded in the corporate records. The other transaction that
Supply Chain and Estream consider to be evidence of abuse of the corporate form was the payment of
management fees. These fees are not extravagant beyond any reasonable business usage, and, indeed,
were approved by Congress Financial, ACT’s third-party lender. Contra, George Hyman Constr. Co.,
16 F. Supp. 2d at 157 (transaction extravagant where shareholders purchased Ferrari and Mercedes for
their own use through corporation). (l) Use of the Corporation in Promoting Fraud. Finally, the court
considers whether there is any basis upon which to conclude that the corporation was used to perpetrate
a fraud. There is no such basis here. The record contains no evidence warranting a finding that ACT
was established or operated so as to misrepresent or divert assets. The facts that in the six years that it
operated, ACT employed 400 full-time and part-time employees located at one of its three
manufacturing facilities, and that ACT delivered value to its customers, suggest that ACT was
established to manufacture products, not to swindle sales representatives, like Supply Chain and
Estream, out of money. When determining whether to pierce the corporate veil, one examines the twelve
factors to form an opinion whether the overall structure and operation misleads. There is present in the
cases which have looked through the corporate form an element of dubious manipulation and
contrivance, finagling, such that corporate identities are confused and third parties cannot be quite
certain with what they are dealing.
Here, although Sun Act was a controlling shareholder of ACT, it did not own all of ACT’s stock. It
supplied ACT with some operating funds. ACT conducted some business that benefited the Defendants.
But here, separate corporate boundaries were maintained, and third parties did not think of themselves
as dealing with Sun Capital directly. Supply Chain and Estream in this case entered into a conventional
brokering sales arrangement with ACT, and were not misled into doing so on the belief it was doing
business with one of the Defendants.
In order to hold the Defendants liable for ACT’s conduct, ACT’s corporate veil must be pierced.
Defendants have shown that, as a matter of law, Supply Chain and Estream cannot establish that the
corporate veil should be pierced in this case, and therefore, the Defendants are entitled to summary
judgment.
I.
JUDGMENT
Synergies3 and DIRECTV shall not be liable for compensation. First of all, the
behavior of McLaughlin and Castro is personal and does not bring benefits to the
employer, nor is it something that the employer tacitly approves. There is no evidence
that the theft or conversion was for the benefit of Synergies3 or DIRECTV or to
promote their benefit. Synergies3 and DIRECTV have no direct or indirect
responsibility. McLaughlin and Castro should compensate Corvo and Bonds
separately.
LEGAL PRINCIPLE
A. Issue
Whether the court should rule on the employer when it is unaware of the personal behavior of
the employee?
B. Holding
No
III.
Reasoning
A. General Analysis
Corvo and Bonds sued McLaughlin, Castro, DIRECTV and Synergies3 Tec
Services. They believe that McLaughlin and Castro were stealing and conversions
with the acquiescence of their employers. But the actions of McLaughlin and
Castro were carried out without the employer’s knowledge and did not generate
benefits for DIRECTV and Synergies3. DIRECTV and Synergies3 should not be
held indirectly or directly responsible for the personal actions of McLaughlin and
Castro.
II.
B. Applied Analysis
When McLaughlin and Castro stole, it was their personal behavior. It was an act
that was carried out suddenly while doing work, and there was no plan. Moreover,
this violated the direct order of the employer and did not get the acquiescence of
the employer. They steal for their own benefit, but the employer will not profit
from the theft. Therefore, there is no indirect or joint liability.
IV.
JUDGMENT
McLaughlin and Castro should compensate Corvo and Bonds and be responsible for
the theft. This is their personal behavior. At the same time, they also violated the
contract signed with the employer. DIRECTV and Synergies3 do not need to pay
additional compensation for employees’ personal actions in breach of contract,
because they did not profit from this matter, so there is no indirect liability.
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
by
Robert S. Wiener
Problem solutions and examination essay answers are similar. Both call upon
you to apply legal principles to practical business situations. Your answers must set
forth reasons for conclusions stated. Organize and write them clearly using standardEnglish syntax and spelling. Include the area of law, parties, and legal issues. Include,
explain, and apply legal terms.
PROBLEM SOLUTIONS
Problem solving prepares you to write examination essays. Read the chapter and
assigned case opinions and write your case briefs. Then read the first assigned problem
a couple of times. Return to the text and analytically read the part of the chapter that
discusses the legal issue(s) raised in the problem. Keep an eye out for legal terms in
the problem. They are a key to the legal issue(s) and may appear in bold type in the
text. Read the problem again. You may want to make notes for your solution now — at
least, organize it in your mind. Do this without looking back at the text.
You are ready to write your problem solution. The advice given in “Cases and
Briefs” will help. For problems containing multiple questions, repeat the brief format writing your solution as an essay using separate paragraphs for separate sections. You do
not need to use headings. Leave space at the margins and between the sections of
your solution to revise it, for example, during/after classroom review.
The format for a problem solution and essay answer is a modification of your
brief format. It will generally look like this:
January 28, 211/28/21
1
PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
I
JUDGMENT
II
A
B
LEGAL PRINCIPLE
ISSUE
(Question of Law)
HOLDING (Answer of Law)
A
B
REASONING
GENERAL ANALYSIS
APPLIED ANALYSIS
III
IV
JUDGMENT
I. JUDGMENT
In the first section, present your judgment. Omit the facts section. Copying facts
takes time with no benefit; however, you will refer to specific facts in your applied analysis section. Unlike briefs where you are asked to show your understanding of the
judge’s judgment, here you give your judgment (legal decision) based upon legal principles. Usually, in your problem solution you are called upon to judge a case, that is, to
decide who wins and explain why. If you are not yet clear on your judgment, leave this
section blank and return to it after you have written your reasoning sections.
II. LEGAL PRINCIPLE
Now your real work begins. In this section write the key legal principle guiding
your judgment, that is, your issue and holding. Merely writing the judgment is not
enough, even if it is correct. More importantly, you must explain your judgment. How
did you arrive at your conclusion?
!
1/28/21
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PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
I. REASONING
A. GENERAL ANALYSIS
This is General Analysis is the first part of your legal reasoning, your, including
the area of law. Elaborate on the issue and holding and discuss secondary legal issues.
This section should be fully developed, step-by-step, particularly for examination essays. You will base this on legal principles learned from reading the textbook, reading
and briefing cases, and class lecture and discussion.
B. APPLIED ANALYSIS
In Applied Analysis apply the general analysis to the problem’s relevant facts.
IV. JUDGMENT
Repeat your judgment to confirm that this is the legal decision to which your analysis leads. Has your judgment changed? If so, correct the judgment in your first section
so that both judgments match.
Problems and essay questions are often tricky. You may be unsure of the judgment. That is OK. There may be no clear answer. The correct answer usually earns only
10 points on an examination. And you may earn full credit for either of two different answers. Your objective is to convey that you have thought through the case from a business law perspective; therefore, the most important parts of your problem solutions and
essay answers are your legal principle and reasoning section.
How much time should this take? In order to be prepared to write well-organized
and thorough exam essays, for homework problem solutions, first read the relevant part
of the of textbook, then spend at least 20 minutes answering each problem.
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PROBLEM SOLUTIONS AND ESSAY ANSWERS
Langvardt et al., BUSINESS LAW (17th ed. 2018)
ESSAY ANSWERS
Essay answers are different from problem solutions in a few ways. Exams are
closed book and timed. You may have aout 40 minutes to answer an exam essay compared to 15-20 minutes on a CPA exam. First, read the question at the end of the essay. Next, use your case reading techniques to read the question’s facts several times.
Plan your answer before you begin writing. Crossing out and rewriting essay answers
wastes time. Exam questions are likely to be lengthier and more complicated than problems, with more facts and raising several legal issues rather than just one.
Grading of Essay Answers
Your grades on exam essay answers largely reflect your preparation. If you have
written your assignments (both case briefs and problem solutions), participated in class,
taken effective notes, and studied your assignments and notes well, reviewing them
soon after class, you should understand the legal principles and be able you to apply
them to new situations.
To earn more essay points, spot legal issues in essay questions. Then answer
those questions using legal terms to explain and apply relevant legal principles learned
in class. Basic terms, especially those written on the board, may earn credit if used appropriately and explained. A minimum of 120 points will be available for each exam; correct judgments earn 10 points. Sometimes, legal labeling of parties, for example, assignor and assignee in an assignment of rights contract case, will earn credit.
The better you prepare for exam essays by writing class assignments (and even
writing extra practice problem solution essays), the better you will perform on the exam
essays.
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