FACTS

John is an inventor.He has developed a process that turns pet waste (dog and cat) into energy pellets that can be used to fuel circular fire pits for use on patios, decks and balconies.The fire pit kits include four containers into which the pet poop is placed then sealed.Water and chemicals are added to the containers then a handle is turned, creating 7 square pellets which look like charcoal. The pellets must sit for a week in the container so that they can dry.After the week, the container can be opened and the dried pellets removed.To operate the fire pit, the user takes a pellet, places it in a well at the bottom of the fire pit, pours a little starter fluid on the pellet and lights the pellet.The pellet fire lasts about an hour.

John is very excited about his invention.He is sure it will be very successful.He wants to market it for use in urban areas where there are many people in apartments with pets and small balconies.He says it is a "green energy product" because it disposes of pet waste in a better way than just bagging it up in plastic bags and putting them in the trash or leaving pet waste outside to pollute the environment.He calls his invention Poop Away Fire Pits.He has intellectual property rights to the name and the invention.

Mary is the President of Pet Lawns, Inc.Pet Lawns sells small squares of grass that sit in plastic trays.Pet owners (mostly dog owners) buy these pet lawns so their pet can use them inside or on a patio or balcony instead of having to take their pets out for a walk to "do their business" as they say.Pet Lawns is the largest company in its market.Pet Lawns is a private closely held corporation.The three shareholders are Mary and her two sons, Peter and Paul.Mary owns 52 shares of the 100 outstanding shares of stock of Pet Lawns, Inc.Each of her sons own 24 shares of stock in Pet Lawns, Inc.The three of them own 100 percent of the stock of Pet Lawns.Each of them serves on the Board of Directors. Peter used to be the sales manager of Pet Lawns but he was recently fired by his mother because he was doing such a poor job.Peter was replaced in this position by his brother, Paul. Peter's only position now with Pet Lawns, Inc. is as a shareholder and member of the Board of Directors.

Kathy is the President of Kathy's Kitty Litter and Pet Sitter Company.She owns 100 percent of the stock of her company. She incorporated her company, but has never had any shareholder or board of director meetings and keeps no separate bank accounts, other than her personal bank accounts where she deposits all the money from the business.She has never filed any tax returns for the business.She has no other officers.Her company hires independent contractors, called "Pet People", who go to the homes and apartments of people with cats and remove and replace cat litter.These Pet People will also walk dogs or pet sit for an additional fee.Customers contact Kathy's company from the company's website and Kathy assigns Pet People who have signed up with her to the customers.Under the terms of Kathy's agreement with the Pet People, Kathy supplies all the cat litter and pays a Pet Person a fixed fee per house to replace the cat litter.If the Pet Person is hired to pet sit or walk dogs, the fees for these additional services are split between Kathy's company (10%) and the Pet Person (90%).Kathy has a Pet Person Manual in which she has detailed instructions about how to replace the kitty litter and dispose of the used litter.She also provides each Pet Person with a t-shit with her company logo and name.They are instructed to always wear the t-shirt when doing work for the company.

John, Peter and Kathy belong to the same book club.One day after the club meeting the three of them go out for coffee.John is excited to share with Peter and Kathy about his new invention.Peter says, "We should work together.I could help with marketing and sell your Poop Away Fire Pits with my company's pet lawns.I mean, the lawns provide a constant supply of fuel."John was aware that Peter was an owner of Pet Lawns, Inc.

Kathy is also excited.She says, "I have wondered what to do with all the cat poop in the cat litter we remove from the customers.I am sure we could help sell your product to our customers. I could also set up a plant and produce pellets for resale to people who don't make enough poop pellets for their needs.

John says he will think about ways to work together and the friends go home.

John needs to raise $500,000 US dollars to be able to set up a manufacturing plant to start commercially producing his Poop Away Fire Pits.John asked Peter for advice about how to raise this money.John explains that he has found a warehouse to lease for the plant and has bids for all the things he needs to start production, but can't sign anything until he has the money.Peter tells John, "My company will invest $500,000 with you in exchange for 51 percent of the stock of the new company."John is not excited about giving up 51% of his company, but he does need the money, so he agrees.John signs contracts with suppliers of the machinery and materials he will need to start large scale manufacturing. and signs a lease for a warehouse to open his manufacturing plant.On each of these agreements, the signature line reads:

Pet Poop Away, Inc.

By John Smith, President.

John finds standard forms of corporate organizational documents on the internet and creates his corporation, Pet Poop Away Inc.John does not use a lawyer and does not file the corporation documents with any authorities.

Peter also tells John he wants to be the sales manager for Pet Poop Away, Inc. and be paid a salary based on a commission of 10 percent of the sales price for every Poop Away Fire Pit he sells.John agrees.Peter prints business cards that say Peter is Sales Manager of Pet Poop Away, Inc.Peter is a signatory on a bank account for Pet Lawns, Inc. His mother had meant to take him off the account when he was fired, but she has not gotten around to it.He writes a check to John for $500,000 on that Pet Lawn, Inc. account.John gives Peter share certificates for 51 shares of stock in Pet Poop Away, Inc.showing the owner as Pet Lawns, Inc.John uses some of the $500,000 to make payments on the contracts for materials and equipment and some for a rent deposit for his warehouse.

Purporting to act on behalf of Pet Poop Away, Inc., Peter signs a contract with Kathy in which Kathy agrees to buy 25,000 Pet Poop Away fire pits at a cost of $50 each.The contract contains a delivery schedule and other terms.

One week later, at the board meeting of Pet Lawns, Inc., Peter is very excited.He thinks his mother will be so proud of him and will give him back his old job at Pet Lawns, Inc.He tells his mother and brother that he has agreed, on behalf of the company, to invest $500,000 in Pet Poop Away, Inc.He shows them the stock certificate.His mother, Mary, is furious.She says "You are not authorized to spend that kind of money.You are in big trouble. Go cancel that contract now and get my money back."Peter says, "I can't.I have already given John the money."Peter does not tell his mother or brother about his employment agreement with Pet Poop Away, Inc. or the commissions he will get for the sales to Kathy's Kitty Litter company.

Questions

1)Mary comes to you.She wants to get the $500,000 back and cancel the agreement with Pet Poop Away, Inc.What is your advice to her about what rights and causes of action she and Pet Lawns, Inc. have?What defenses does John have if he does not want to give back the money?What rights or claims does John have against anyone as a result of these transactions?

2)Assume the same facts above with these additional facts.John has been able to produce 25 Pet Poop Away Fire Pits a day in his small plant while he is waiting to open his larger plant with the $500,000 he got from Peter.Peter delivered 10 fire pits to Kathy under their agreement and she sold them to her customers.One of the customers and one of her Pet People were terribly burned when the Pet Person tried to light their fire pit to show the customer the product.

The injured customer/plaintiff comes to you and asks what rights and causes of action he may have and against whom as a result of his injuries.Since our class is in Business Enterprise Law, do not discuss the issue of tort negligence or strict liability under tort law.Assume that the product was defective and that the Pet Person was negligent in trying to demonstrate how it worked.Focus your answer on whom might be liable for the customer/plaintiff's injuries.