Case Study 2
Fred’s Miracle Cough Syrup has hit the market and become a huge
success with the burgeoning integrative medicine demographic. Per your
advice, Fred has patented his famous concoction and trademarked the
Fred’s Miracle Cough Syrup name and logo. Demand is so high that
Fred and Sally are working full-time on the business. Their children, Sam
and Lilly, and their respective spouses, Jane and Tim, have joined the
company full-time as well. In fact, Fred and Sally have made Sam and
Lilly part owners of the business. Fred, Sam, and Tim handle the
production, sales, and delivery. Sally and Lilly handle the majority of the
administrative and business management tasks, while Jane acts as the
bookkeeper. Sally and Fred are the only authorized signatories on the
corporate account.
Sally and Lilly have been hard at work securing a new production facility
and distribution chain to accommodate an upcoming contract with a
national chain. After locating a large warehouse on several acres, Sally
and Lilly approach their local credit union for a loan. The business has
only one business credit card used to purchase supplies for the
production of Fred’s Miracle Cough Syrup, and there is a small mortgage
outstanding on the family farm. Personal debts of the individual family
members consist of small credit-card balances for Fred, Sally, Sam, and
Lilly as well as an auto loan on Sam’s van.
During the commercial loan accounting review process, Sally and Lilly
discover that Jane has been siphoning off large amounts of corporate
money and “cooking the books” to hide her actions. Jane has written
several checks from the corporate account and forged both Sally’s and
Fred’s signatures. Jane has made out all but one of the forged checks to
Don, a local loan shark, in an effort to repay her gambling debts. The
check Jane did not deliver to Don was made out to “Cash,” which she
slipped into the collection box at church in an effort to absolve her guilt.
The embezzlement was so severe that the family fears that Fred’s
Miracle Cough Syrup is now on the brink of bankruptcy. Meanwhile,
Sam’s refusal to enter into an exclusive distribution deal with the local
drugstore has enraged Bob, the owner. Bob has now reverse engineered
Fred’s cough syrup recipe and has posted it online in an act of
vengeance.
As Fred and Sally tearfully recount the events of the past month, you
reassure them that you are on the case, and you begin to ponder the
legal issues at hand.
Specifically, the following critical elements must be addressed:
1. What legal defenses might Fred and Sally raise with
regard to the checks written by Jane to Don? Why
do you believe they will be successful or
unsuccessful?
2. What legal defenses might Fred and Sally raise with
regard to the check written by Jane and delivered to
the church? Why do you believe they will be
successful or unsuccessful?
3. What, if any, civil claims do Fred and Sally have
against Jane based on her actions? Why do you
believe they will be successful or unsuccessful?
4. Analyze the forms of bankruptcy available to the
business in this instance (assume the business
entity is the same form as you chose in Case Study
1). What form is most appropriate and why?
5. Analyze the implications of a potential bankruptcy
action on the business assets (assume the business
entity is the same form as you chose in Case Study
1). Explain which, if any, are subject to forced sales,
liens, or forfeiture.
