Ch 28 Question CPA Law

Topics: Corporation, Fiduciary, Ontology, Contract, Friendship, Agent / Pages: 1 (284 words) / Published: Jun 12th, 2015
Chapter 28 Question 5

Joseph Bitter and two brothers, Joseph Smith and Steve Smith, became good friends. As a result of their friendship, they decided to go into the tavern business together. The parties bought an existing tavern and took title in the name of their corporation; Gomer’s Inc. Soon the brothers began feuding with bitter and because of their combined two-thirds interest, assumed virtual control of the business. In response bitter claimed that he and the brothers (the promoters) not the corporation held title to the real state. He claimed that Gomer’s Inc., could not own the building because the corporation was not yet in existence when the contract was made. Do the promoters, rather than the corporation, own the building?

Yes, promoters are liable on contracts they make on behalf of corporations that are not yet formed. This is based on agency law that says that an agent who makes a contract for a nonexistent principal is personally liable for it. Therefore, Joseph Bitter and the smith brothers are responsible for the liability that created the purchase of the tavern.

After reading the case, it mentioned that Bitter’s argument has no merit since they all owed a fiduciary duty to the corporation that they were intending to form to which they were acting as stockholders. Bitter was the attorney for the corporation therefore he had an additional obligation. The record also showed that all negotiations for purchase of real state were made on behalf of Gomer’s Inc. Lastly the case mentions that Bitter cannot profit personally from this transaction and he cannot assert personal ownership of the real state against the other stockholders to whom he had to show good faith

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