Determine the liability of all concerned

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Reference no: EM133936045

Question

Vera Marques, a single mother with three children, signs an agreement to buy May Ling^ prime s house. Relying on this agreement, Ling purchases a new house for herself. Marques must sell her own home to complete this purchase. She sells it to Madison Construction Limited, which is a small one-man company. The sole shareholder, officer, and director is Rick Madison. The purchase agreement is signed "Madison Construction Ltd. per Rick Madison, president."

Marques has barely enough money to make ends meet, so she checks out Madison's record carefully and learns he has been successfully buying old homes and renovating them for resale for over 20 years.

Unfortunately, before closing the deal, Madison has a heart attack and can't arrange financing. The series of agreements falls like a chain of dominoes: Ling can't close her deal; Marques can't close her deal. Ling sues Marques for her loss of $50,000, and Marques claims against Madison Ltd. and Rick Madison personally. Assume that Madison Ltd. has no assets; however, Rick Madison does have considerable personal wealth.

1. Draw a diagram of the above contracts and then determine the liability of all concerned and indicate which party will get a judgment against another party. Who will ultimately bear the loss?

2. Are there any grounds to pierce the corporate veil and make Rick Madison personally liable to Marques? Is it fair that Marques bears the loss and that Rick Madison keeps his wealth and contributes nothing to the loss? Is fairness a ground for penetrating the corporate veil?

3. Assume that at the time that the agreement was signed, Madison Ltd. had not actually been incorporated. Rick Madison had been carrying on business as a sole proprietor and had only recently instructed his lawyer to apply for incorporation. The incorporation of Madison Ltd. was in effect a few days after Madison signed the agreement to purchase the house from Marques as described above. Is there now any ground to obtain personal liability against Rick Madison?

4. What could Marques have done to obtain personal liability against Madison?

5. In a situation such as the above sale of a home, is there any difference in risk in selling to a small company such as Madison Ltd. and to a couple with children?

Reference no: EM133936045

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