Ruiz v Born2Swim and Cook

The Scenario

For several years, Angie Cook owned and operated several small businesses as a sole proprietor. Three years ago, she bought an Olympic-sized indoor swimming pool at a foreclosure sale, with plans to operate it as a year-round swimming pool, complete with individual and family memberships, swim lessons, water aerobics classes, and competitive swim and water polo teams. Angie contributed $100,000 in starting capital, which was just enough to purchase the pool, finance initial advertising, and leave a reserve of $10,000.

She properly incorporated Born2Swim, Inc., as a C-Corporation in State A; even though the state allows shareholders to elect close corporation status, she did not do so. Angie owns 90% of the shares in the corporation and serves as president of the company. Her husband Ben owns 5% and serves as the corporation's vice president and secretary, while their son Chad owns the remaining 5%. Angie, Ben, and Chad also comprise the corporation's board of directors. Chad is a college sophomore, planning to major in business. Angie and Ben thought it might enhance his resume and distinguish him from other business students competing for internships to be able to list serving as a corporate director. When Angie calls a meeting of the board of directors, he attends virtually.

A few months after purchasing the pool, Angie opened it for business. Glad to have the pool back in operation, the community responded enthusiastically, and the company operated with a substantial profit for more than a year. Angie deposited most of the corporate revenue in her personal bank account, including checks payable to Born2Swim, Inc., typically leaving only enough in the corporate account to pay the pool's bills and leave a small balance. In March of the second year, Angie and Ben took a 2-week vacation in Europe to celebrate their 25th wedding anniversary. They paid for their airline tickets from the corporate bank account. Last fall, Angie decided to have the pool repainted. Because business was slow; the corporation's bank account did not have sufficient funds, so Angie wrote a personal check for the job.

As president of the corporation, Angie does not consult Ben and Chad before making any business decisions affecting day-to-day operations of the pool. Born2Swim, Inc. holds an annual shareholder meeting. As the majority shareholder, Angie votes to re-elect herself, Ben, and Chad as directors, and Ben dutifully records the minutes of those meetings. Angie, Ben, and Chad do not hold regular meetings of the board, but when Angie believes she needs to consult the board on a policy issue, she calls a board meeting that both Ben and Chad attend.

Concerned that the pool would not make enough money to turn a profit this year, Angie took a part-time job in telemarketing, working for a local real estate company. She used the pool's office phone to make calls and deposited her telemarketing income into her personal bank account. Busy with her telemarketing activities, Angie got behind in managing the corporation's paperwork and paying its bills. She failed to pay the insurance premium for Born2Swim when the bill became due; as a result, her carrier canceled the pool's liability insurance.

On May 11, Eduardo Ruiz drowned in the pool. His parents have brought a wrongful death suit against Born2Swim and against Angie Cook in her individual capacity as the corporation's primary shareholder. At the time of the suit, the corporation had the $10,000 reserve, less than $1,000 in its bank account, and no liability insurance. Because of these limited funds, the child's parents hope to pierce the corporate veil to recover most of their damages directly from Angie.

Instructions and Advice

Analyze the scenario using the FIRAC model to determine if Angie can be held personally liable for any debt of the corporation arising from Eduardo's death.

Before you begin writing your paper, you may want to review the information in the Corporations module relating to the personal liability of shareholders.

In your identification and discussion of the Rule, make sure that you start with the general rule regarding the liability of shareholders for debts of the corporation before you discuss the exceptions to that rule (and each of its components that might result in the court applying an exception to hold a dominant shareholder personally liable).

Do NOT discuss whether Angie has breached any fiduciary duties owed to the corporation or its shareholders, as this analysis is NOT pertinent to the wrongful death lawsuit filed by Eduardo's parents against Born2Swim and Angie Cook.