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J.Hazelbaker, Attorney
Category: Business Law
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Experience:  Experienced and trained in the area of business law.
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Will you please answer this question for me 17.9 Piercing

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Will you please answer this question for me
17.9 Piercing the Corporate Veil M. R. Watters was the majority shareholder of several closely held corporations, including Wildhorn Ranch, Inc. (Wildhorn). All these businesses were run out of Watters’s home in Rocky Ford, Colorado. in Teller County, Colorado. Although Watters claimed that the ranch was owned by the corporation, the deed for the property listed Watters as the owner.Watters paid little attention to corporate formalities, holding corporate meetings at his house, never taking minutes of these meetings, and paying the debts of one corporation with the assets of another. During August 1986, two guests of Wildhorn Ranch Resort drowned while operating a paddleboat at the ranch. The family of the deceased guests sued for damages. Can Watters be held personally liable?
Geringer v. Wildhorn Ranch, Inc., 706 F.Supp. 1442, 1988
U.S.Dist. Lexis 15701 (D. Colo.)

Case 17.9 -- Piercing the Corporate Veil

Can Walters be held personally liable for Wildhorn’s debts and torts? Why or why not?

18.7 Franchise Agreement Libby-Broadway Drive-In, Inc.(Libby), is a corporation licensed to operate a McDonald’s fast-food franchise restaurant by the McDonald’s System, Inc. (McDonald’s). Libby was granted a license to operate a McDonald’s in Cleveland, Ohio, and was granted an exclusive territory in which McDonald’s could not grant another franchise. The area was described as “bound on the north by the south side of Miles Avenue, on the west and south side by Turney Road, on the east by Warrensville Center Road.” In December 1976, McDonald’s granted a franchise to another franchisee to operate a McDonald’s restaurant on the west side of Turney Road. Libby sued McDonald’s, alleging a breach of the franchise agreement. Is McDonald’s liable? Libby-Broadway
Drive-In, Inc. v. McDonald’s System, Inc., 391 N.E. 2d 1, 1979
Ill.App. Lexis 2698 (Ill. App.)

Case 18.7 -- Franchise Agreements

Is McDonalds liable for breaching the franchise agreement with Libby? Why or why not?
Submitted: 7 years ago.
Category: Business Law
Expert:  J.Hazelbaker replied 7 years ago.
A. The elements to consider in "piercing" the "corporate viel" or liability "shield" include:

(1) failing to follow the required formalities in company administration; (2) undercapitalizing the company; (3) using the business to achieve fraud; (4) failing to properly document transactions between the company and its owner(s); and failing to keep separate financial records for the company and its owner(s).

Walters appears to meets several of these elements. Most importantly, the land on which the accident occurred is deeded to him personally. Therefore, unless there is a lease and indemnity agreement between him and the corporation, which is highly unlikely given his habit of not following corporate formalities in other respects of the business, then he will have personal liability for the accident. This is enough to avoid the liability shield, but comingling funds and otherwise ignoring corporate formalities make this is a relatively easy case for shield piercing.

B. No. McDonald's is not liable because they have not breach the agreement. The new franchise was granted on teh "West" of Turney Road, which also serves as the Western boundary for the exlusive territory as defined in the subject franchise agreement. Thus, the new franchise is beyond the exclusive territory as specifically provided for in the agreement.

Please let me know, if you have follow-up questions.

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