Reference no: EM131440171

Amy Rockwell was a brilliant but penniless engineer. She had designed a new type of cogeneration plant that she believed had great commercial potential. On January 15, she approached Benjamin Forman, a successful and experienced manager in the energy field, with the idea of starting Cogen, Inc., a corporation devoted to building a plant based on this new design. Forman was enthusiastic. On January 28, he enlisted the support of Clyde Pfeffer, a well-known venture capitalist who had retired from venture capital work but was looking to invest the proceeds of his past endeavors. On February 16, Pfeffer gave the green light to establish the new enterprise.

Forman retained the law firm of Wilson Scott Associates to handle the details of incorporation. Andrea Scott, one of the partners, drafted the articles of incorporation, signed them as the incorporator, and filed them with the secretary of state on February 28. She then advised her clients that the articles had been filed. Because of a typographical error, the articles of incorporation filed with the secretary of state referred to the company as Cogene, not Cogen.

Rockwell, Forman, and Pfeffer decided that they would save further expense by completing the incorporation process without any more assistance from Wilson Scott. On March 3, they held what they called the meeting of incorporators to elect the directors and proceeded to elect themselves to the board. As board members, they appointed themselves as the company’s officers. They typed up the minutes of this meeting.

On March 4, the daily operations of Cogen, Inc. commenced. In all of their transactions with third parties, the officers represented themselves as doing business for the corporation. One of these transactions was with Firstloan Bank, which lent the company $5 million. The representations in the loan agreement stated that the corporation had been duly formed, that it existed as a valid corporation under Texas law, and that the shares of stock owned by the various shareholders had been duly authorized and were fully paid.

On May 5, the corporation began building its cogeneration plant. Three months later, energy prices dropped drastically, and there was no longer a need for a cogeneration facility in that location. The corporation was forced to default on the bank loan. The bank’s lawyers, on being informed that the bank would not receive any more loan payments, reviewed the original loan documents, the articles of incorporation, and the minutes of the first meeting of the incorporators. On reviewing these documents, they initiated an action directly against the three founders in their individual capacity for liability on the bank loan.

    a. Should the founders have done anything differently?

    b. Are the founders personally liable for the bank loan?