Covaltowned 25% of the stock and Hughes owned 75% of the stock of CSI, Inc.Both were the only officers and directors of the corporation also. CSI, Inc. manufactured and sold parts for the automobile industry.As the officers and directors of the corporation, they received a salary.

In addition to forming the corporation, they both formed another separate partnership called HC Partnership, to build and then lease an office building. Both contributed to the cost of constructing the office building. HC Partnership was the owner of theoffice building andleased this office building to CSI, Inc., for $1,800/month, the fair market value of the rental. The lease was for 15 years and was in writing, signed by all parties in their representative capacity for each business entity.

Each month each partner thus received $900 income from this rental minus any expenses. You can assume this to be a fair rent. This was separate from any income they received from CSI, Inc.

(Note to students. You can assume all of the business forms and relationships are legal and validly formed, and no issue relates to the above situation. Everything so far is perfectly legal. The issue arises next.)

Several years laterCovaltsold his shares of CSI, Inc. to Hughes. Hughes thus became the sole shareholder of CSI, Inc.Covaltno longer received a salary or dividends from CSI, Inc. as he was no longer an employee or shareholder.

However,Covaltstayed in the partnership, HC Partnership, and continued to receive 1/2 of the rental payment be $1,800 a month rent each month less any expenses and repairs.The 15-year lease ended. Hughes signed a new lease as the president of CSI, Inc. with HC Partnership. Hughes also signed the new lease as a partner of HC Partnership. The amount of rent was reduced to $500/month.Covaltobjected because he was now receiving only $250/month rental income not $900/month. The fair rental value of the property has actually risen in the last 15 years.

Has Hughes breached his duty of good faith toward his partner,Covalt? Partners have a duty to act in good faith with each other. Although good faith is difficult to define and depends on the circumstances, partners should not receive a profit at the expense of their partners, nor lie or cheat them. (Citations omitted.)

In this situation Hughes has breached his duty of good faith to his partnerCovaltby signing a new lease for less than the fair market value. Hughes should have signed a lease for the fair market value of the building and not used his status as the agent of each company to bind the companies to a lease that is so unprofitable to the partnership.Covaltis entitled to damages.

(Amount of damages not addressed here to make problem shorter.)

What is the name of the company that owns the real estate, that is the office building,that is rented out?

a.HC Partnership

b.Covalt and Hughes

c.CSI, Inc.

d.Covalt only

e.Both b and c are correct.