Chapter 4 - Constitutional Authority to Regulate Business s11

BLTC-9e Case Problem with Sample Answer Chapter 36: Corporate Acquisitions, Takeovers, and Termination

36–5 Case Problem with Sample Answer

Clara Mahaffey operated Mahaffey’s Auto Salvage, Inc., in Dayton, Ohio, as a sole proprietorship. In 1993, Kenneth Stumpff and Mahaffey’s son, Richard Harris, joined the firm. Stumpff ran the wrecker and bought the vehicles for salvage. Harris handled the day-to-day operations and the bookkeeping. They became the company’s equal 50 percent shareholders on Mahaffey’s death in 2002. Harris, who inherited the land on which the firm was located, increased the rent to $1,500 per month. Within two years of Mahaffey’s death, and without consulting Stumpff, Harris raised the rent to $2,500. Stumpff’s wife died, and he took a leave of absence, during which the company paid him $2,500 a month and provided health insurance. After two years, Harris stopped the payments, discontinued the health benefi ts, and fi red Stumpff, threatening to call the police if he came on the premises. Stumpff withdrew $16,000 from the fi rm’s account, leaving a balance of $113. Harris offered to buy Stumpff’s interest in the business, but Stumpff refused and fi led a suit in an Ohio state court against Harris. A state statute permits the dissolution of a corporation if the owners are deadlocked in its management. Should the court order the dissolution of Mahaffey’s? Why or why not? [Stumpff v. Harris, __ N.E.2d __ (Ohio App.2 Dist. 2006)]

Sample Answer:

The court issued a judgment that included an order to dissolve Mahaffey's. On appeal, a state intermediate appellate court upheld the lower court’s order. The appellate court pointed out that under the applicable Ohio state statute, “to affirm the decision of the trial court ordering the judicial dissolution of Mahaffey's, Inc., it is necessary that one of the litigants demonstrate that the two directors and sole shareholders, Richard Harris and Kenneth Stumpff, are deadlocked in the management of the corporate affairs. . . . [T]here are two directors and two fifty- percent shareholders in Mahaffey's, Inc., i.e. plaintiff-appellant Stumpff and defendant-appellee Harris. Harris requests that the corporation be dissolved, while Stumpff opposes the dissolution. Moreover, . . . Harris and Stumpff are unable to work together. After discontinuing his salary when Stumpff failed to return to work after two years, Harris fired him from his position at Mahaffey's. Harris also barred Stumpff from entering the business premises. Stumpff unilaterally withdrew a substantial amount of funds from Mahaffey's corporate account after he was discharged, thus impairing the ability of the business to operate effectively. . . . [I]t is abundantly clear that Harris and Stumpff were hopelessly deadlocked in the management of the corporate affairs. Thus, the trial court did not err when it . . . ordered judicial dissolution pursuant to [the applicable statute].”