Select two of the scenarios listed below and explain the best solution for each. Include comments related to any ethical issues that arise. Support your responses with appropriate cases, laws and other relevant examples
Scenario I – Business Organizations
Yolanda, Ginny, and Sara met while working for the Campus Subs in Knoxville, Tennessee. Yolanda was attending college to earn a business degree in hospitality. Ginny was attending culinary school to become a chef, and Sara was a recent graduate in sales and marketing. The three ladies decided to open their own soup and sandwich restaurant on wheels, also known as a food truck. They planned to start small with one truck but had big dreams to own a whole fleet of trucks that served a variety of foods.
Yolanda took a business law class and remembers there are several forms for organizing businesses. The ladies have come to you for advice about the various forms of business organizations.
- Evaluate three forms of business organizations including advantages and disadvantages related to the business the ladies plan to operate. At least one of the options must be the LLC or LLP.
- Select a business form for the friends and defend your choice.
- Explain the requirements for starting that form of business in your state.
Scenario 2—LLC Liability
Plaintiffs Karl and Ginny Drake were injured by lead paint while living in a house owned by Riverwood Homes, LLC. The plaintiffs sued Bill Ding, a member of the LLC at the time it owned the property, alleging that he was liable for their injuries. Ding had limited involvement with the property. He has never visited the property, and neither he nor the LLC was aware that the plaintiffs were occupying the property until after the LLC acquired it. Once they realized this fact, they took legal action to have the plaintiffs removed. The applicable housing code imposes liability on any individual who "owns, holds, or controls" the title to the property.
- Is Ding liable for the plaintiffs' injuries?
- What are the policy arguments in favor of both parties?
Scenario 3—Securities
In 2010, after working at Regions Bank for 6 years, Noah Lott helped found Nova Capital Corporation, a venture capital firm that invested in the technology sectors. NCC went public in 2012, and Lott served as its CEO and chairman of the board. Various documents filed with the SEC stated that Lott "earned his MBA in finance from Harvard University and an undergraduate degree in management.” In fact, he attended Harvard for only year and did not graduate. After being pressured by a journalist, Lott disclosed the misrepresentation to the NCC board. The same day, the company issued a press release correcting the statement.
The press responded negatively to "another CEO that lied about his resume" and speculated about "what else might not be right.” On the day the press release was issued, NCC's stock price dropped from $33.58 per share to $26.40, but it fully recovered within a six weeks.
Shareholders sued, alleging that the misrepresentation violated section 11 of the 1933 Act, section 10(b) of the 1934 Act, and Rule 10b-5.
- Was Lott's lie about having a college degree material?
- Would your answer be the same if a CEO lied about having helped to take a company through an initial public offering and subsequent acquisition by another company and having led a pharmaceutical company from incorporation through human clinical trials and launch of a new drug?
- If you were a member of the NCC board, would you be comfortable keeping Lott as CEO once you learned that he had lied about having a college degree?
Scenario 4 – Bankruptcy and Secured Transactions
Coastal Property Restoration (CPR) periodically purchased used restaurant equipment from Slyce Pizza Company. CPR refurbishes and sells restaurant equipment to small restaurants. In December 2015, CPR purchased five used pizza ovens for $25,000. Because of the good relationship between the companies, Slyce financed the ovens for two years; however, Slyce did not obtain a perfected security interest in the ovens. In July 2016, CPR sold four of the ovens to another refurbishing company for $2,000 two days before filing bankruptcy. CPR still owes approximately $20,000 to Slyce for the ovens.
Evaluate the legal and ethical issues associated with CPR's sale of the pizza ovens before filing bankruptcy. What recourse does Slyce have in recovering the monies still owed on the equipment or the remaining oven?
need to see you cite and reference your work fully as well as to have it in the proper APA format.
respond to the 2 students responses
Scenario 2—LLC Liability
In my opinion, Bill Ding is not directly responsible for Drake's injuries. The couple's home is owned and rented by an LLC of which he is a member. The LLC is not required under federal law to check a place of residence for lead or take any action in this regard. Upon signing or renewing a lease it is their (LLC) responsibility to reveal that there is lead paint throughout the home. “Landlords also need to give you a lead hazard information booklet by the Environmental Protection Agency (EPA) (Justia, 2023)”. The LLC may be penalized for not disclosing or proving that the Drake’s received the information about lead being in the home.
The Drakes have the right to sue the LLC Company as they are the property's owners, even if they cannot sue Bill Ding. Legal statutes pertaining to eviction are nonexistent for the LLC, barring an unpaid sum owed by the Drakes. Even though they must take certain actions to get payment before they may be evicted. The LLC cannot serve them with an eviction notice if there are no further conditions, such not allowing them to play loud music inside their house. The Drake family may file a lawsuit since the LLC corporation is responsible for the property.
Bill Ding cannot be sued by the Drake’s. He is not the single owner of the property he’s with an LLC. “LLC stands for limited liability company, which means its members are not personally liable for the company’s debts (Citizens, 2023)”. If it could be proven that the Drake’s received a pamphlet about lead paint from the other property owners, they would not be able to sue the LLC either. As a landlord you must be aware of laws behind lead paint. To become one of the best landlords you must uphold the law and your rights as a property owner.
Scenario 4 – Bankruptcy and Secured Transactions
Coastal Property Restoration filed bankruptcy after selling four of the five ovens for $2000. Considering their relationship, the ovens were financed by Slyce for two years. “The new provision has been described as similar to a discharge of debts under a bankruptcy proceeding because it “wipes out the debt period” (Bagley. 2018, p. 571)”. It's critical to understand if the property is exempt or non-exempt to assess the legal and moral concerns. Given the circumstances of the case, the used pizza ovens are exempt property because they are crucial to the primary goals of the company for Coastal Property Restoration. The sale before the two days of bankruptcy is immoral as Coastal Property Restoration and Slyce had a strong working relationship and Slyce had financed the same for Coastal Property Restoration benefit for two years. Slyce also did not obtain a full security interest in the ovens. CPR made a deceptive decision, going bankrupt and selling the ovens for a small amount of money. The bankruptcy court will consider the legal concerns surrounding Coastal Property Restoration sale of the pizza ovens before to filing for bankruptcy, as well as the reason for the sale of exempt property at that time. The court is looking into the cause for the selling of old pizza ovens.
Slyce was not granted any interest or value in the ovens under bankruptcy law, nor was he granted a perfected security interest in them. Slyce can only get the money back for the remaining oven, even though he still owes money on the equipment that was sold. Even though he still owned the oven, Slyce is unable to get the money back because he provided the financing. Slyce's primary default action was his inability to get a comprehensive and robust security interest in ovens. The bankruptcy court may consider prior circumstances such as:
· The financial state of CPR at the time of the oven transfer.
· The received fair value and ownership over the previous pizza oven.
· Whom Coastal Property Restoration assigns the ovens (to the alternative refurbishing firm).
· What Coastal Property Restoration possessed upon the bankruptcy and transfer.
References
Bagley, C. E. (2018). Managers and the Legal Environment: Strategies for Business (9th ed.). Cengage Limited. https://digitalbookshelf.southuniversity.edu/books/9780357902851
Lead hazards on rental property & tenants’ legal rights and options. (n.d.) Justia. Retrieved from https://www.justia.com/real-estate/landlord-tenant/information-for-tenants/environmental-hazard/lead-hazards/
What does LLC mean and is it right for your business? (n.d.) Citizens. Retrieved from https://www.citizensbank.com/learning/what-does-llc-mean.aspx
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Scenario I
Three women setting up a food truck business need to determine the best way to formalize their business.
Types of Business Organizations
These budding entrepreneurs could set up a partnership. The advantages of a partnership are, easy to establish with minimal paperwork, partners can combine expertise, and workload is distributed among partners (Bagley, 2018, pg. 593). The profits earned pass through the partnership to the individual partners, making filing taxes easier for simple businesses (Bagley, 2018, pg 593). Some disadvantages are the potential for disagreements, difficulty in transferring ownership, and full liability for all members (Bagley, 2018, pg. 593).
The second is a limited liability partnership. The advantages of a limited liability partnership or LLP are; all partners have limited liability for their own actions, not the actions of the other partners; they can distribute the management duties out unequally allowing each partner to bring their strengths to the business (Bagley, 2018, pg. 594). One disadvantage of an LLP is they are complex. The legal and financial details of running an LLP can be greater than those of running a sole proprietorship or partnership, and if someone leaves an LLP, the business must be dissolved and a new LLP put in place (Bagley, 2018, pg. 594).
Third is a limited liability company (LLC). These have advantages, such as offering legal protection by creating a financial barrier between the owner and the company, requiring less paperwork and fees than a corporation, and allowing for pass-through tax (Bagley, 2018, pg. 596). There are a few disadvantages such as in many states, professionals cannot form an LLC, and LLCs can cost more to run than LLPs (Bagley, 2018, pg. 596). A member must include the LLC’s profits in their personal taxes.
Recommendation
Given the nature of their business and their future plans, I would recommend forming an LLC. This structure provides the ladies with the legal protection they need while keeping the paperwork and fees relatively low. It also allows them to bring in more members in the future as they expand their fleet of food trucks. This arrangement gives them the flexibility to allocate profits and losses. For example, each of them has a strength to offer the business, one is a business major, one is a chef, and one is a sales and marketing expert. The LLC will allow each of them to participate in the business and allocate control of their area (Bagley, 2018, pg. 596). This is important if they branch out and expand to either buy more food trucks or open a restaurant in a permanent location. The central benefit is that this LLC is a separate entity from the three owners. As owners of the food truck LLC, they have limited liability; the ladies' individual assets may not be used to satisfy the debts and obligations of the LLC (Furniss, 2018, pg. 18).
How to Set Up in Georgia
In the state of Georgia, there are a few steps to set up an LLC. First, select a name and a registered agent. This agent will send and receive legal papers for the LLC ( Register an LLC With Georgia Secretary of State, n.d.). Then, file for the articles of organization from the state ( Register an LLC With Georgia Secretary of State, n.d.). For tax purposes, the next step is to obtain an Employer Identification Number or EIN ( Register an LLC With Georgia Secretary of State, n.d.). If the business sells goods or collects taxes, then you will need to register with the Georgia Department of Revenue and open a business checking account. Depending on the business, the last step may require business licenses or permits ( Register an LLC With Georgia Secretary of State, n.d.).
Scenario III
The CEO has been found to have made misleading and false information about his education.
Material
Securities Act of 1933 and the Securities Exchange Act of 1934, Rule 10b–5 says that managers and their companies can be held responsible for any document that contains false information (Bagley, 2018, pg. 703) ( Securities Exchange Act 1934, n.d.). This includes a press release, a letter to shareholders, and public announcements, as long as the statements were made that a reasonable shareholder would consider it important in deciding how to vote their shares or invest their money (Bagley, 2018, pg. 703). The courts have held that individual owners can sue someone who breaks the rules for damages (Bagley, 2018, pg. 703). In this case, Lott misrepresented his educational qualifications and this could be considered material as it might influence an investor’s decision. The subsequent significant drop in the company's stock price further reinforces the significance of this misrepresentation. It is important to note that even if the stock price eventually returns to its previous value, the act of misrepresentation cannot be ignored. In TSC Industries, Inc. v. Northway, Inc., the case involves a claim that the proxy statement was incomplete and misleading. The lower court determined there was materiality ( TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), n.d.). The court determined that materiality is objective and that there was a violation for omitting key data ( TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), n.d.). The Supreme Court overruled and said there was enough information in the report to make a determination; however, there was still some misrepresentation ( TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), n.d.). This case highlights there are subjective judgments that would need to be made to determine if the CEO violated any code.
Situation Change
Yes, the answer would be the same. If a CEO lied about their professional experience, especially about significant achievements such as leading a company through an IPO or launching a new drug, it would likely be considered material. These are significant factors that could influence an investor’s decision to invest in the company. Both educational and prior work experience are material (Bagley, 2018, pg. 703). With educational misrepresentation, investors may question the CEO's integrity and credibility to make sound business decisions. A CEO's prior work experience is an important indicator of their ability to navigate complex business challenges. Therefore, any misrepresentation could lead to doubts about the CEO's competence and potentially impact the company's overall performance and investor confidence. In conclusion, misrepresentations, whether in stock prices or a CEO's background, carry significant consequences and must not be taken lightly in the world of investing.
Board Opinion
As a hypothetical board member, learning that the CEO had lied about his qualifications would be concerning. Trust and integrity are crucial in a leadership role, and such a revelation could damage the trust between the CEO and the board, employees, and shareholders (Adams et al., 2010, pg. 91). It could also potentially harm the company’s reputation (Adams et al., 2010, pg. 94). Therefore, it would be uncomfortable to keep Lott as CEO after learning about the lie. If Lott's overall performance has been exceptional and his contributions to the company have been significant, the board may consider giving him a second chance. However, if the lie has caused irreparable damage to the company's reputation or if Lott's leadership abilities come into question, the board may have no choice but to remove him from his position. Ultimately, the board would need to weigh the potential consequences of keeping Lott as CEO against the benefits he brings to the company. If the Board's makeup was more outsiders than company insiders, then they tend to be more shareholder-friendly and less friendly to Lott (Adams et al., 2010, pg. 97). This could determine how the Board could react to Lott's misrepresentation.
References
Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey. Journal of Economic Literature, 48(1), 58–107. https://doi.org/10.1257/jel.48.1.58
Bagley, C. E. (Ed.). (2018). Managers and the Legal Environment: Strategies for Business (9th ed.). Cengage Limited. https://digitalbookshelf.southuniversity.edu/books/9780357902851
Furniss, J. L. (2018). Piercing the Veil:Traditional Corporations Versus Limited Liability Companies. International Journal of Business and Public Administration, 15(1), 16–29.
Register an LLC with Georgia Secretary of State. (n.d.). Georgia.gov. https://georgia.gov/register-llc
Securities Exchange Act 1934. (n.d.). LII Legal Information Institute. https://www.law.cornell.edu/wex/securities_exchange_act_of_1934
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). (n.d.). Justia. https://supreme.justia.com/cases/federal/us/426/438/