Question

After graduating from college with a horticulture degree, LilyCalla began a small business providing plant consulting and designservices for hotels, office buildings and malls. One of her clientswas an attorney who suggested that she incorporate her business.She followed his advice and became the sole shareholder, directorand officer of Calla Lily, Inc. The main assets of the corporationwere Lily’s consulting accounts. The business had little need foradditional capital.

Lily realized early on that she could make more money if shealso grew the plants that she recommended to her clients. Sheenlisted the help of one of her former botany professors, SusanBlackeye, and together they began a small greenhouse operation.Lily and Susan formed a separate corporation for the greenhousebusiness, L&S Greenhouses, Inc. They needed additional capitalfor the greenhouse business, so Lily contacted some of her formerclassmates. Five of her friends each paid $1000 and Calla Lily,Inc. and Susan each contributed $1000, and their services asincorporators and consultants. Calla Lily, Inc. owned 51% of theshares in L&S, Susan owned 39% and each of the friends owned2%. Lily and Susan were the sole directors and Lily was thePresident and CEO. L&S borrowed $15,000 from the Last LocalBank (LLB) giving it sufficient funds to rent a small plot of land,install two large greenhouses, and purchase necessaryequipment.

L&S Greenhouses, Inc. was unable to keep up with the demandfor plants for Lily’s consulting jobs, so L&S contracted withanother small greenhouse to start plants for it. That greenhousewas owned by Jacob Sladder. Jacob entered into a contract withL&S to provide a certain number of each of about twenty typesof plants. Payment would be made as the plants were delivered toL&S. Assuming Jacob successfully grew all of the plants in thecontract, he would be paid $13000. This was a big account for Jacoband he terminated several of his smaller customers in order to meethis obligations to L&S. Before the L&S contract, Jacob had$10,000 annual income from those customers.

Meanwhile, Lily, acting as CEO of Calla Lily, Inc. and CEO ofL&S, caused L&S to enter into a contract with it, wherebyL&S would sell its plants to Calla Lily, Inc. at a price farbelow fair market value. Susan was in charge of the greenhouseoperation. Because she was a scientist and had no interest in thebusiness side of things, Lily acted on behalf of L&S in itsbusiness dealings. Susan was completely unaware of the pricearrangement between Calla Lily, Inc., and L&S regarding theplants.

Another reason Susan may have been unaware of the deal is thatshe was using a section of the greenhouse to grow marijuana and shewas regularly testing her plants for quality control purposes.Susan was certain that her state was going to pass a marijuana lawin the next couple of months and she thought L&S should beready to fill the need that was going to be created by the law assoon as it came into effect. She fully researched the markets inColorado and Washington in order to best position L&S for entryinto the new pot market.

It was not too long, however, before the fortunes of thesecompanies changed dramatically. The new governor and majority inthe state legislature not only killed the marijuana bill, theypassed a substitute measure funding a major anti-drug initiativeand hiring additional drug enforcement agents. According to aprominent state senator, the program was designed to “root outthose who plant that wicked weed” and reverse the increasing socialacceptance of the drug. It wasn’t long before L&S’s greenhouseswere raided by the state narcotics squad. The state confiscated thepot plants and the greenhouse equipment that was used in the potcultivation. This was basically all of the greenhouseequipment.

The local newspaper ran the story about L&S on the frontpage. Jacob Sladder realized he might have a financial interest inthese events. He tried to contact L&S without success. Hefinally found Lily and asked whether L&S was going to honor theremaining 8 months of his contract. She said she did not knowwhether L&S was going to be able to stay in business. WhenL&S failed to make a payment to Jacob, he sued L&S, CallaLily, Inc., Susan and Lily,Lily’s former classmates were also veryupset. As shareholders of L&S, they sued Susan for her decisionto grow pot. Susan defended herself, claiming that she did it witha good faith belief that it would greatly benefit the business ofL&S as soon as the new law passed. In fact, Susan argued,L&S should indemnify her for any fines or penalties that mightbe imposed on her personally as a result of her running this aspectof the business.

Evaluate the claims presented by these facts. Discuss all issuesfully.

1. Can Jacob seek payment from anyone besides L&S? If so, onwhat basis? If not, why not?

--- I can see that L&S is responsible, but if L&S cannotpay can the corporate veil be pierce to go after Calla Lily Inc.?Since it is a shareholder of L&S and dominates L&S. ThenCalla Lily forced L&S and Calla Lily into a contract to sellthe plants below fair market value causing financial hardship.

2.Do the L&S shareholders have a claim against Susan and/orthe corporation regarding the marijuana?

----I know the business judgement rule can apply, but since theact was illegal doesnt void everything?

3. Does Susan have a valid defense? Why or why not?

4. Is Susan entitled to indemnification from L&S for anylosses she suffers as a result of the drug arrest?

--- This is what I have so far, is growing the pot a crinimalact? Susan is not entitled to indemnification. Susan meets therequirements for indemnification based on the first tworequirement, acting in good faith and reasonably believing it wasin the best interest of the corporation. She met the tworequirements, but with a criminal fine a third requirement isestablished. This third requirement under the Business Law text “…that the director had no reasonable cause to believe her conductwas unlawful.”