Clark_11e-AM-Ch37.doc

Clark_11e-AM-Ch37.doc - C HAPTER 3 7 LIMITED LIABILITY...

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291 C HAPTER 37 L IMITED L IABILITY C OMPANIES AND S PECIAL B USINESS F ORMS A NSWERS TO Q UESTIONS AT THE E NDS OF THE C ASES CASE 37.1— (PAGE 761) THE ETHICAL DIMENSION Did any of Magnolia’s members, managers, or agents act unethically? Explain. No, with the exceptions of Dunnmoyer and possibly Stovall. The statement of facts does not mention that Stovall admitted to Dunnmoyer that she ordered the walk and that she initially refused to discharge McFarland. These additional details would seem to exonerate Stovall, who terminated McFarland out of fear for her own job, from both legal and ethical responsibility. Dunnmoyer, however, knew the facts, and assuming that McFarland answered the inspector’s questions truthfully, there would seem to be no ethical basis for Dunnmoyer’s subsequent action. The other members, managers, and agents of Magnolia likely were unaware of the events until after they occurred, and thus, unless they could have ordered McFarland’s reinstatement, there may be little ground for finding them to have acted unethically. THE LEGAL ENVIRONMENT DIMENSION Why is the liability of the members of LLCs limited with respect to the firm’s debts and other obligations? The liability is limited to encourage business activity. If the member of an LLC were liable for the firms’ transgressions and obligations whether or not the member knew of or participated in those actions, the economic activity of the firm would be severely curtailed. Every act of the company would arguably need to be approved by every member. In most organizations, this process would slow business to less than a crawl, while each act and its options and consequences were reviewed. CASE 37.2—(PAGE 764) WHAT IF THE FACTS WERE DIFFERENT? Suppose that Kuhn and Tumminelli had signed a written operating agree - ment that required both members’ indorsements when cashing customers’ checks. Assuming that Quick Cash would have known of this requirement, would the result have been different? If so, how? Yes. In the actual case, as one of
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292 UNIT EIGHT: BUSINESS ORGANIZATIONS the owners of the LLC and its manager, Tumminelli had the authority to indorse its checks and was placed in this position by the LLC and Kuhn. Under those facts, it was not unreasonable for Quick Cash to rely on Tumminelli’s authority. It would have been unreasonable, however, for Quick Cash to have known that it was cashing checks for someone who did not have the authority to receive the payment. THE LEGAL ENVIRONMENT DIMENSION What does the outcome in this case suggest to potential members of LLCs who want to avoid the negative consequences of debt and litigation to which Kuhn was subject? If a future member of an LLC wishes to avoid the circumstances in the Kuhn case, one option is to carefully determine and set out the members’ rights with respect to the LLC. The members might limit each other’s access to, or use of, company funds, for example. Also, a member might want assurance that other members are
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This note was uploaded on 10/11/2010 for the course MGT 301 taught by Professor Pederson during the Fall '10 term at SUNY Stony Brook.

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Clark_11e-AM-Ch37.doc - C HAPTER 3 7 LIMITED LIABILITY...

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