July 2018 Second Example Ten-point Answers to Virginia Essay Questions
July 2018 - QUESTION 3 – VIRGINIA BAR EXAMINATION
Together Riles Plumlee and Izzy Jones renovate and sell older buildings in the City of Manassas, Virginia. In January of 2017, Riles acquired in his name only the property at 101 Madison Street, consisting of a parcel of land and an abandoned building, with the intention of renovating the building with Izzy and then selling the entire property (the “Project”).
As they had done previously on other properties, Riles handled the finances and Izzy hired the contractors and oversaw their work on the Project. Despite extensive work on the building’s roof, the Project’s roof leaked when it rained.
Concerned about the leaking roof, Riles and Izzy decided that they should try to “decrease liability” on the Project, so they formed a Virginia corporation, Madison Corporation ("MadCorp"). Riles and Izzy are identified as the sole directors, stockholders, and officers of MadCorp.
MadCorp maintained customary corporate records (including articles of incorporation, bylaws, and meeting minutes). However, Riles used his personal checking account as the exclusive deposit and payment account for the Project, just like he had done on other properties that Riles and Izzy had worked on previously. MadCorp had no bank account of its own and had no access to Riles’ personal checking account.
Riles aggressively marketed the Project for sale, and while in the course of doing so, Riles deeded the project to MadCorp, which had no other assets.
Not long thereafter, MadCorp, as seller, entered into a contract to sell the Project to Doctors in Your Neighborhood, Inc. (“Doctors”), a Virginia corporation, as buyer. The contract of sale contained, among other things, MadCorp’s express warranty of good workmanship, as well as the statement that “the foregoing warranty shall be deemed merged into the deed at closing, and shall not survive closing.” At closing, MadCorp delivered to Doctors a quitclaim deed for the Project, which did not reference any provision of the parties’ contract of sale and which contained only customary language about transfer of title. The sale proceeds were deposited into Riles’ personal checking account.
Within two months after closing, Doctors discovered that multiple roof leaks have damaged the building. Doctors’ calls and demands to MadCorp went unanswered, so Doctors has initiated a legal action against MadCorp asserting a claim for breach of express warranty of workmanship, and also seeking to recover damages from Riles and Izzy personally, in the Circuit Court for the City of Manassas, in order to be compensated for the damage caused by the roof leaks.
|(a)||Is Doctors’ express warranty claim against MadCorp viable as a matter of law? Explain fully.|
|(b)||Is Doctors likely to prevail against Riles and Izzy personally, and if so, on what theory? Explain fully.|
July 2018 - QUESTION 3 – EXAMPLE ANSWER #1
(A) Is Doctors’ express warranty claim against MadCorp viable as a matter of law?
There are several types of deeds obtainable such as general warranty deed and quitclaim deed. A general warranty deed provides many implied warranties of fitness and habitability. However, a quitclaim deed provides none of those warranties, and is the most risky kind of deed to obtain for a buyer. However express warranties of good workmanship and other such warranties will be held valid when it is merged into the deed at closing. Also, if they are also the builder, a seller may be held liable for any material defects of structural integrity in a building to the buyer of real property.
In this case, MadCorp will be held liable for breach of the express warranty of good workmanship, because at the time they entered into contract to sell the Project to Doctors, they were already aware that they were in breach of their express warranty. Although they did not provide Doctors with a general warranty deed with implied warranties, they entered into a valid sales contract with Doctors that contained an express warranty of good workmanship. Also, they were builders in that they had extensive work on the building’s roof done in order to sell the building. Therefore, Doctors’ express warranty claim against MadCorp shall be viable as a matter of law.
(B) Is Doctors likely to prevail against Riles and Izzy personally, and if so, on what theory?
A plaintiff may pierce the corporate veil of a corporation and hold directors of a corporation personally responsible for a claim if they can show that the actions of the directors were inappropriate or that they were engaging in fraud or misrepresentation. A corporation must be founded on a purpose other than to escape personal liability. Also, there must be no comingling of corporate and personal funds by the directors and officers.
In this case, Doctors will likely prevail against Riles and Izzy personally, because they improperly formed a corporation to escape personal liability, and they acted inappropriately as sole directors, stockholders, and officer of MadCorp. The property at 101 Madison St. was acquired solely in Riles’ name instead in the name of the corporation that was at the time non-existent. Riles and Izzy engaged in fraud when they entered into the corporation for the sole purpose of “decreasing liability” for themselves after running into issues due to the Project’s leaky roof. Riles acted incorrectly when he used his personal checking account as the exclusive deposit and payment account for the Project. MadCorp must have a bank account of its own, and because it did not Riles will be liable for comingling of corporate and personal funds. Also, Riles and Izzy engaged in misrepresentation, when they entered into a contract to sell the Project to Doctors, because they included an express warranty of good workmanship when they knew that the roof was having issues with leaking when it rained. For these reasons, Doctors will likely prevail against Riles and Izzy personally to recover damages caused by the roof leaks.
July 2018 - QUESTION 3 – EXAMPLE ANSWER #2
3(a): Doctors’ express warranty claim is viable as a matter of law. Under the merger doctrine, title warranties made in a land sales contract are “merged” into the deed upon closing, such that a buyer may not sue a seller on warranties of title made in the sales contract and may only resort to the warranties made by the deed. Here, MadCorp transferred a quitclaim deed to Doctors, which makes no warranties of title. However, the express warranty of good workmanship is not a warranty of title and therefore did not merge into the deed at closing. Thus, unless properly disclaimed by the contract, it will be a valid claim against MadCorp, and possibly Riles and Izzy personally.
An express warranty of good workmanship may not be easily disclaimed, and it is unlikely that a statement that the warranty will be deemed merged will be an effective disclaimer because it is not a warranty of title, and therefore cannot be merged into the deed. When MadCorp warranted good workmanship, they made it difficult to disclaim that warranty. Thus, Doctors likely may proceed on its claim against MadCorp and Riles and Izzy.
3(b): Doctors likely can hold both Riles and Izzy personally liable. Riles and Izzy will not automatically be held personally liable because they are stockholders and directors of MadCorp, a corporate entity. Under Virginia law, the stockholders and directors of a legal corporation may not be held personally liable for the obligations of the corporation unless: (1) they agreed to be held liable; (2) they caused the obligation by their own tort; or (3) there are grounds for piercing the corporate veil and holding the stockholders liable. Grounds for piercing the corporate veil include: (a) abuse of the corporate structure and formalities such that the corporation is merely an alter-ego of one or more of the stockholders; (b) undercapitalization of the corporation against foreseeable liabilities at the outset of its formation; or (c) to otherwise prevent the stockholders from using the corporation to commit a fraud or other bad act. Piercing of the veil is more likely in suits in tort than suits for contract breach.
Here, the facts show that Izzy nor Riles have agreed to be held liable for the contractual warranties it made to Doctors, and Doctors is not claiming that either committed a tort giving rise to its obligations. As such, Doctors’ best argument will be that the MadCorp corporate veil should be pierced. Doctors has evidence on all three grounds to support piercing the corporate veil.
First, there is evidence to show that Riles and Izzy did not observe corporate formalities or maintain a degree of separation between them and the corporate entity they created. Riles used his personal checking account as the exclusive deposit and payment account for the Madison Street project. MadCorp did not have its own account. Although the corporation did maintain customary records, the actions by Riles in particular demonstrate that Riles, and likely Izzy, veiwed MadCorp as merely a liablity shield and not as an entity apart from them.
Second, Doctors can argue that the veil should be pierced because MadCorp was never fully capitalized against foreseeable liabilities. The facts show that the Madison Street property was the only asset MadCorp owned, and now it does not even own that property. This suggests that Riles and Izzy did not intend for the corporation to be separate and properly capitalized to pay for potential liabilities. It is not unforeseeable that real estate sales and renovations could give rise to liabilities, but Izzy and Riles did not start MadCorp with sufficient assets to guard against those liabilities. If the corporate veil is not pierced, Doctors will argue, it would not receive an adequate remedy because MadCorp is essentially judgment proof. An equitable remedy, such as piercing the veil, is justified in situations where money damages would not be adequate because the defendant is insolvent.
Finally, and in addition to the other grounds for piercing the corporate veil, Doctors can argue also that the veil should be pierced to prevent Izzy and Riles from abusing the corporate veil to shield their own fraudulent actions. The facts show that Riles and Izzy did not form the corporation until after the Madison street property project was underway, and did so to “decrease liability,” and with knowledge of the leaky roof. To not pierce the veil in this instance, Doctors will argue, would allow Izzy and Riles to get away with a fraud and an abuse of the corporate system.
With arguments for all three, independent grounds for piercing the veil, Doctors must also show that Riles and Izzy should both be held liable. Even when the corporate veil is pierced, a court is unlikely to hold shareholders and directors who were inactive in the management of the corporation liable for its obligations. Here, the facts show that both Izzy and Riles were active in the operation of MadCorp. Although Riles committed much of the improper conduct, both parties had a role in the project in question and Izzy was aware, or should have been aware, of Riles’s abuses. Thus, with grounds to pierce the veil, and as both Izzy and Riles were active in the management of MadCorp, both may be held personally liable.