Case Problem Analysis 39.1 and 39.2

12. Courts will ignore the corporate structure and make the shareholder-owners personally liable when the corporate structure is _____(1)_____ for personal benefit or when the corporate form is _____(2)_____ from the controlling shareholder.

(1) abused (2) indistinguishable

14. Given the life of the corporation, it _____(1)_____ that the corporation was set up to always be insolvent, or was undercapitalized. It also _____(2)_____ that the corporation was formed to evade a legal obligation.

(1) does not appear (2) does not appear

15. There _____(1)_____ evidence that the corporate formalities were not followed and there _____(2)_____ evidence that Tony Smith commingled funds.

(1) is no (2) is no

5. Laker Express _____(1)_____ a creditor and _____(2)_____ able to recover the amount owed from Smith Services, Inc.

(1) was (2) was not

39.2: What If the Facts Were Different?

Assume that in addition to the facts given, that evidence was presented to the court that Smith, his wife, and their kids regularly used the account at Laker Express to fill up their personal vehicles. Does this change the outcome?

3. When Tony Smith set up an account for Smith Services, Inc. with Laker Express, __________ would be liable for any charges on that account.

Smith Services, Inc.

39.1: Corporate Formation

Smith Services, Inc., was a trucking company established in 2015 and owned by Tony Smith as the sole shareholder. Tony Smith also was the president of the company. Tony Smith set up an account with Laker Express, a fuel provider, on behalf of Smith Services, Inc., and his drivers often would charge fuel purchases for the company trucks to that account. Laker Express then would bill Smith Services regularly for the charges on the account. After several months of low business, Smith Services ceased doing business and was dissolved in 2018, with its assets being distributed to creditors. Laker Express only recovered a small part of the amount owed by Smith Services, Inc. Tony Smith then opened up a new trucking service business as a sole proprietor. Laker Express sought to recover Smith Services' unpaid fuel charges, which amounted to about $35,000, from Smith. Smith argued that he was not personally liable for a corporate debt. Should a court hold Tony Smith personally liable?

1. Smith Services, Inc. was a

corporation.

4. When Smith Services. Inc., dissolved, it apparently __________ owe money to creditors.

did

13. In this situation, it __________ that Laker Express was tricked into dealing with the corporation instead of the individual.

does not appear

2. A business of this type __________ considered a separate legal entity from its owners.

is

7. One of the advantages of being a shareholder in a corporation is the __________ liability of shareholders.

limited

9. If Smith Services, Inc., was dissolved, and assets were distributed, then Tony Smith likely __________ the value of his investment.

lost

10. Tony Smith __________ have had assets outside of the company that he would have been allowed to keep when the company was dissolved.

might

11. If Laker Express is attempting to receive payment from the extra assets of a shareholder, it would be asking the court to

pierce the corporate veil.

16. Given these facts, a court __________ pierce the veil of Smith Services, Inc., and hold Tony Smith personally responsible for the debt.

should not

8. The principle of limited shareholder liability means that shareholders are not personally liable for the debts of the corporation beyond

their investment in the corporation.

6. Tony Smith __________ a shareholder in Smith Services, Inc.

was

5. The court likely __________ find that the personal and corporate interests were commingled to such an extent that the corporation had no separate identity with regard to the relationship with Laker Express.

would

6. Because of these findings, the court likely __________ pierce the corporate veil and hold Tony Smith personally responsible for the debt to Laker Express.

would

1. Given this new evidence, a court likely __________ find that Laker Express was tricked or misled into dealing with the corporation rather than the individual.

would not

2. The court likely __________ find that the corporation was undercapitalized.

would not

3. The court likely __________ find that the corporation was created to evade an existing legal obligation.

would not

4. The court likely __________ find that the corporation failed to comply with the required corporate formalities and meetings.

would not