California State University Northridge Business Law Case Study

Description

In December 2018, Josh incorporated The Divine Grape, Inc. to own and operate a winery in Napa Valley. Josh paid $1000 for 100 shares of stock and, at the same time, loaned The Divine Grape, Inc. $80,000. Josh elected himself, his wife, Leslie, and adult son, Oliver, to the Board of Directors. The Board then hired Josh as President.

In April 2020, The Divine Grape, Inc. sold 20 shares of stock to Winnie for $20,000.

After Winnie became a shareholder, The Divine Grape, Inc. hired Leslie and Oliver as additional officers of the corporation and paid them a salary sufficient to ensure that there would be no profits remaining to pay as dividends to Winnie.

In June 2021, Josh, Leslie, and Oliver voted for The Divine Grape, Inc. to acquire the surplus inventory of Pro Winery LLC, which Josh solely owned, for the price of $50,000. Leslie and Oliver relied on Joshàopinion that this was a fair price for the inventory. In fact, this price was greatly inflated. After the purchase, Josh began gradually taking much of this inventory for Joshàpersonal use without paying for it. Josh would also frequently cause The Divine Grape, Inc. to pay Joshàpersonal bills.

In order to fund the purchase of the surplus inventory of Pro Winery LLC, The Divine Grape, Inc. took out an unsecured loan from Bank of America for $50,000. Two days before the Bank of America loan was due to be paid back, The Divine Grape, Inc. repaid the $80,000 loan from Josh. This left The Divine Grape, Inc. with only $5,000 in total assets, and unable to pay back the loan to Bank of America.

Bank of America filed a lawsuit against both The Divine Grape, Inc. and Josh personally, seeking to recover its $50,000 loan. Winnie filed an action against Josh, Leslie, and Oliver, alleging that the directors had breached their fiduciary duties to both her and The Divine Grape, Inc. The directors filed a motion for summary judgment in Winnieàlawsuit, claiming that their decisions were protected by the business judgment rule.

On what theory can Bank of America sue Josh personally for the loan that it made to The Divine Grape, Inc.? Is Bank of America likely to prevail? Why or why not?

Did Josh, Leslie, and Oliver breach their fiduciary duties to the corporation and to Winnie? Which duties and why? Were the decisions of the Board protected by the business judgment rule? Why or why not?

Explanation & Answer:

3 pages

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