The Scenario
Anne Smith owns several small businesses in Monroe, Mythigan, including a small daycare and a laundromat. In October 2017, she bought an indoor trampoline park in Monroe 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 the state of Mythigan; 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 corporations vice president and secretary, while their daughter Carrie owns the remaining 5%. Anne, Brandon, and Carrie also comprise the corporations board of directors. Carrie recently graduated from college with a finance degree and Anne and Brandon thought it might enhance her resume and distinguish her from other recent graduates competing for finance positions to have experience as a corporate director. She typically attends meetings virtually.
At its first meeting, the Board of Directors adopted the bylaws that outline Just Jump’s management structure and govern its day-to-day operations. In addition to stating the company’s purpose, the bylaws identify the rights and duties of the officers, directors, and shareholders; establish quorums for meetings and voting; specify procedures for electing and removing directors, their qualifications, and their terms of office; set up procedures for the annual shareholders meeting; and spell out how to amend the bylaws. The bylaws specify that the board must be comprised of at least three directors and that the Board of Directors must meet quarterly, though they can meet more often if policy issues requiring the Board’s approval arise. The bylaws also require that accurate and detailed minutes of all board and shareholders’ meetings must be taken and maintained.
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. has held an annual shareholder meeting each year. As the majority shareholder, Anne votes to re-elect herself, Brandon, and Carrie as directors, and Brandon dutifully records the minutes of those meetings. For two years the Board of Directors met four times annually as required by the Corporate Bylaws, with Brandon diligently keeping minutes of each meeting. Since then, however, Anne decided that the board didn’t need to meet as often. Instead of regular meetings, Anne calls a board meeting once or twice a year when she believes she needs to consult the board on a policy issue; both Brandon and Carrie have attended all Board meetings.
After cleaning and repairing all the trampolines, remodeling the facility to add a snack bar and small retail area, and hiring instructors to teach classes, Anne was able to open the trampoline park in January 2018. Glad to have the trampoline park back in operation, the community responded enthusiastically, and the company operated with a substantial profit for several years. 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 staff and other bills, leaving only a small balance in Just Jump’s bank account. In February 2022, 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 Just Jump account, leaving so little in the account that the following month when Just Jump’s quarterly taxes were due, she paid them with a check drawn on her personal account.
In May 2023, Anne realized that she needed to have some of the older springs on the trampolines replaced before she began offering summer classes. The repair bill was larger than Anne anticipated and Just Jump’s bank account did not have sufficient funds. Anne paid for the repairs with funds from her daycare business.
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 parks 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 corporations 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 parks liability insurance in February. Rule statement should discuss e-book case Weston v. Sherman (1998) on piercing the corporate veil.
On March 5, 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 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 Judson and Jessica Martin have brought a lawsuit against JustJump, Inc., and against Anne Smith in her individual capacity as the corporations primary shareholder for more than $50,000,000 in damages for Alexa’s 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, but 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 injuries if JustJump is unable to satisfy a judgment against it.
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:
Remember, you are not allowed to use any generative AI tools (e.g., ChatGPT or Perplexity) to
- assist in your analysis of the scenario,
- convert an outline you have prepared into narrative format (sentences and paragraphs) for one or more FIRAC components,
- locate appropriate references in the e-book to support your analysis,
- write part or all of your paper,
- correct grammar and spelling, or
- perform any other task associated with your research, analysis, or writing a FIRAC paper on this scenario.
Your use of any AI tool for any portion of this assignment will be considered a breach of the Academic Honesty Policy.
- F – Facts: The relevant background information of the case, outlining what happened.
- I – Issue: The specific legal question that needs to be answered, derived from the facts.
- R – Rule: The applicable law (statute, precedent, etc.) that governs the issue.
- A – Analysis (or Application): The reasoning, explaining how the rule applies to the specific facts to reach a decision.
- C – Conclusion: The final outcome or holding of the case, answering the issue.
Requirements: 20
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