I need 4-5 pages of answer. Alfred, Beth, and Charles orally agreed to start ABC

Question

I need 4-5 pages of answer.

Alfred, Beth, and Charles orally agreed to start ABC Computers (“ABC”), a business to manufacture and sell computers. Alfred contributed $100,000 to ABC, stating to Beth and Charles that he wanted to limit his liability to that amount. Beth, who had technical expertise, contributed $50,000 to ABC. Charles contributed no money to ABC but agreed to act as salesperson. Alfred, Beth, and Charles agreed that Beth would be responsible for designing the computers, and that Charles alone would handle all computer sales.

ABC opened and quickly became successful, primarily due to Charles’ effective sales techniques.

Subsequently, without the knowledge or consent of Alfred or Charles, Beth entered into a written sales contract in ABC’s name with Deco, Inc. (“Deco”) to sell computers manufactured by ABC at a price that was extremely favorable to Deco. Beth’s sister owned Deco. When Alfred and Charles became aware of the contract, they contacted Deco and informed it that Beth had no authority to enter into sales contracts, and that ABC could not profitably sell computers at the price agreed to by Beth. ABC refused to deliver the computers, and Deco sued ABC for breach of contract.

Thereafter, Alfred became concerned about how Beth and Charles were managing ABC. He contacted Zeta, Inc. (“Zeta”), ABC’s components supplier. He told Zeta’s president, “Don’t allow Charles to order components; he’s not our technical person. That’s Beth’s job.”

Charles later placed an order for several expensive components with Zeta. ABC refused to pay for the components, and Zeta sued ABC for breach of contract.

Not long afterwards, ABC went out of business, owing its creditors over $500,000.

1. How should ABC’s debt be allocated? Discuss. Be sure to address what type of formation ABC company is.
2. Is Deco likely to succeed in its lawsuit against ABC? Discuss. Be sure to address contract law and duties.
3. Is Zeta likely to succeed in its lawsuit against ABC? Discuss. Bd sure to address authorities.

Explanation / Answer

1. For debt allocation, it is required to understand what kind of organization it was. As from Limited liability of a person only, no share of contribution by a person, no written agreemnt, it seems more like a partnership firm. In this instance, there is no indication as to what profit sharing arrangement existed, if any at all. As such, the default rule is that this would be a partnership with equal sharing of profits. Furthermore, without an express agreement as to how losses will be shared, the default is that they will be shared just as the profits are shared. Therefore, losses will also be shared equally. The amount of capital contribution by each partner is irrelevant to this equation.

Because of absent of formal agreement A can not even claim for his limited liability. Thus, First, the company must pay all debt creditors first. Second, the company must pay back all capital contributions from each partner, which would be $100,000 to A and $50,000 to B. While C may argue that his contribution was in sales, partners generally have no right to salary or compensation for services unless they are winding up. As such, C is not entitled to this amount as a capital contribution absent any other agreement. Finally, any remaining loss or profit would be distributed as applicable, which is equally in this case.

2. I order to win the case it is essential on part of Deco to show and proove that Beth was authorized to enter the contract. In general, all partners are authorized as agents. Here, there is no indication that Beth was told to enter into a sales contract. In fact, sales were expressly reserved to Charlie.

In addition, Partners have fiduciary duties to each other that are described as the utmost duty of good faith and loyalty. Under the duty of loyalty, a partner must not engage in selfdealing, usurping business opportunities, or competing against the company. In this instance, Beth engaged in a transaction with her sister who owned Deco. The terms were apparently very favorable to Deco. This could be viewed as self-dealing because it promoted Beth’s familial interest with her sister and was not in the best interest of the company.

Thus, Deco will not likely to succeed in its lawsuit.

3. Zeta’s claim on this contract again hinges on the authority of Charlie to enter into it. In this instance, Charlie has the express authority to enter into sales contracts. However, this contract was for components being purchased by Charlie, which is outside his express authority. Zeta may argue that components are necessary to production and later sales, which gives Charlie implied authority to enter into contracts. Plus, it is reasonable to assume that a partner who can sell can also buy. This also lends credence to a claim of apparent authority. Zeta will argue that ABC has held Charlie out as a person whose sole responsibility is to contract, and it reasonably relied on that representation. Zeta’s main issue is that Alfred called and gave actual notice that Charlie could not enter into this contract. This would destroy any reasonable reliance that Zeta had. Alfred told Zeta that Breth was the technical person, not Charlie. As such, Zeta should have seen that his was outside the scope of Charlie’s authority. Notwithstanding the arguments above, Charlie is still a general partner in the company. If Zeta is at all knowledgeable about agency law and partnerships, Zeta could rightly assume that one partner doesn’t have the sole authority to terminate the management authority of another partner. Management functions are only transferable and alterable upon a unanimous vote of the partnership. In this case, Alfred alone tried to limit what Charlie could do. Zeta may argue that it knew this wasn’t a proper action by Alfred and more reasonably relied on Charlie. In the end, I think it is likely that the court would find that Zeta at least should have investigated further once given notice that Charlie may not have authority, and failure to follow through made there [sic] reliance on his apparent authority unreasonable. As such, this contract is invalid and will not bind ABC. Should the court disagree, any resulting contract liability would be distributed among the partnership and Alfred, Breth and Charlie as described above.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.