ABC Food Corporation, a food company with annual sales of more than $1 billion, operated a paper division that supplied ABC with packaging for its food products. ABC’s management determined that the company should concentrate on its core business of manufacturing food products and recommended to the board of directors that the assets of the paper division be sold.

Newcorp, Inc. is a newly formed corporation with two shareholders who have experience in the timber industry. Those two shareholders also jointly own Lumber Corporation, which operates two lumber mills in the state of Washington. Newcorp was formed specifically to acquire the assets of ABC’s paper division. On February 1, 2008, ABC and Newcorp signed a letter of intent specifying a closing no later than July 1, 2008, subject to Newcorp obtaining satisfactory financing. The letter of intent provided that ABC and Newcorp would enter into a long-term contract whereby Newcorp would supply specified quantities of paper packaging to ABC.

On February 15, 2008, Newcorp approached the Bank of Hope to request a term loan to acquire the assets of ABC’s paper division and a revolving line of credit to meet its day-to-day working capital requirements. On March 31, 2008, the Bank of Hope delivered to Newcorp a letter stating that it would agree to extend a credit facility to Newcorp on the terms and conditions described in a term sheet attached to the letter. Bank of Hope required, as a condition to its credit facility, that the credit be secured by all fixed and current assets of Newcorp. Carlos Banker, the account officer for the bank, took all steps necessary to give the bank a valid first-priority lien on all collateral. A major source of revenue for Newcorp will be the long-term supply contract with ABC. The Bank of Hope

is requiring an assignment of the supply contract that prohibits ABC and Newcorp from making any amendments to the contract without the bank’s consent. One of the terms of the Bank of Hope’s loan is a guaranty from each shareholder and from Lumber Corporation.

a. You are a manager of Newcorp. What objections would you have to such an assignment?

b. You are a manager of ABC. Any objections?

c. You are the president of Newcorp. As president, you will be involved in the day-to-day operations of Newcorp. What arguments might you make against giving such a guaranty?

d. You own 51 percent of the stock of Newcorp, and you made loans to Newcorp during the initial stages of its existence. You have since left the running of Newcorp to the president and other managers. What arguments could you make against giving such a guaranty?

e. You are the Bank of Hope’s attorney. What advice would you give the bank about taking a guaranty from Lumber Corporation?