Reference no: EM133247464

For several years, Anne Smith owned and operated several small businesses as a sole proprietor. Three years ago, she bought a trampoline park at a foreclosure sale, with plans to operate it as a year-round jump park, complete with individual and family memberships, tumbling lessons, jump aerobics classes, and private birthday parties. Anne contributed $100,000 in starting capital, which was just enough to purchase the trampoline park,  finance initial advertising, and leave a reserve of $10,000.

She properly incorporated JustJump, Inc., as a C-Corporation in State A; even though the state allows shareholders to elect close corporation status, she did not do so. Anne owns 90% of the shares in the corporation and serves as president of the company. Her husband Brandon owns 5% and serves as the corporation's vice president and secretary, while their daughter Carrie owns the remaining 5%. Anne, Brandon, and Carrie also comprise the corporation's board of directors. Carrie is taking a gap year to to travel and plans to attend college to pursue a business degree next year. Anne and Brandon thought it might enhance her resume and distinguish her from other students competing for scholarships to have experience as a corporate director. When Anne calls a meeting of the board of directors, she attends virtually.  

A few months after purchasing the trampoline park, Anne opened it for business. Glad to have the trampoline park back in operation, the community responded enthusiastically, and the company operated with a substantial profit for more than a year.   Anne deposited most of the corporate revenue in her personal bank account, including checks payable to JustJump, Inc., typically leaving only enough in the corporate account to pay the park's bills and leave a small balance. In March of the second year, Anne and Brandon took a 2-week vacation in Bolivia to celebrate their 30th wedding anniversary.  They paid for their airline tickets and hotel from the corporate bank account.  Last fall, Anne decided to have some old springs replaced on the trampolines. Because business was slow; the corporation's bank account did not have sufficient funds, so Anne wrote a personal check for the job.

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

Concerned that the trampoline park would not make enough money to turn a profit this year, Anne took a part-time job selling cosmetics for a large makeup brand. She used the park's private event room to host makeup parties and deposited her income from those sales into her personal bank account. Busy with selling makeup, Anne got behind in managing the corporation's paperwork and paying its bills. She failed to pay the insurance premium for JustJump when the bill became due; as a result, her carrier canceled the trampoline park's liability insurance.

On January 16, Alexa Martin was wearing a harness while practicing flips on the trampoline for a high school cheerleading routine.  On her third attempt, the harness snapped and Alexa landed on her head, suffering what doctors call a "complete spinal cord injury" that has left her a quadriplegic (both her upper and lower body were paralyzed by the injury).   Alexa was only 15 years old at the time of the incident.  Although it is possible that some rehabilitative interventions may reduce the severity of her paralysis and restore some limited mobility, she is likely to need full-time assistance from a caregiver for the rest of her life to perform activities of daily living (eating, bathing, toileting, dressing, and grooming) and to transfer her in and out of her motorized wheelchair and bed.  She is also likely to suffer from pressure sores; difficulty in breathing, inability to regulate her body temperature; bowel, bladder, and sexual dysfunctions; and other health-related conditions.  

On behalf of their daughter, her parents John and Jessica Martin have brought a lawsuit against JustJump and against Anne Smith in her individual capacity as the corporation's primary shareholder for more than $50,000,000 in damages for her care and loss of enjoyment of life, based on estimates by the Christopher Reeve Foundation.   At the time of the suit, the corporation had a $10,000 reserve, less than $1,000 in its bank account, and no liability insurance. Because of these limited funds, the Martins hope to pierce the corporate veil to recover at least some of their damages directly from Anne.

Instructions and Advice

Analyze the scenario using the FIRAC model to determine if Anne can be held personally liable for any debt of the corporation arising from Alexa's death if JustJump is unable to satisfy a judgment against it.  

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:

• Alexa Martin suffered her injuries as a result of negligence by JustJump or its staff. You can assume the trampoline park is liable.
  Anne has breached any fiduciary duties owed to the corporation or its shareholders, as this analysis is NOT pertinent to the lawsuit filed by the Martins against JustJump and Anne Smith on behalf of their daughter.