Klinicki and Lundgren incorporated to form an air taxi service known as Berlinai
ID: 425229 • Letter: K
Question
Klinicki and Lundgren incorporated to form an air taxi service known as Berlinair, Inc. Each of them owned one-third interest in the corporation. The final third was owned by Lelco, Inc., a company owned by Lundgren. In his capacity as president of Berlinair, Lundgren learned that the Berlinair Flug Ring (BFR) a business association of Berlin's travel agents, was ooking for an air charter service. Lundgren incorpo- rated a new corporate entity called Air Berlin Charter (ABC). ABC then negotiated an air charter contract with BFR. Klinicki brought suit, demanding that Lundgren reimburse Berlinair for any profits made by ABC on the BFR contract. Was this a direct or de rivative suit? Explain. Should the business judgment rule or the fairness rule be used by the court to mea- sure Lundgren's performance? Explain. Who shoulo have won the suit? Defend your choice. [See: Klinicki v. Lundgren, 695 P.2d 906 (OR).] 6.Explanation / Answer
This was the case of derivative suit because:
- Here the cause of action that is incorporating the ABC was done by the Lundgren and not by the Klinicki that becomes the shareholder of ABC in this case.
- Here the ABC is owned by the Lundgren and not Klinicki , as in case of derivative suit, the legal duties are owned by the corporation and not the shareholder.
- This was the case of breach of communication and loyalty between Lundgren and Klinicki, which is a case of derivative suit.
Here, the fairness rule of law should be used by the court rather than business judgment of Klinicki to reimburse profits made by ABC to Berlinair because:
- the ABC incorporation is a solely established by the Lundgren without any share of Klinicki in it.
- even though the ABC acts as a competition to the Berlinair, the profits of ABC cannot be reimbursed to Berlinair as Klinicki is not involved in the incorporation of ABC , which gives advantage to Klinicki and disadvantage to Lundgren if this happens.
- Also, reimbursing profits of ABC is a loss statement to BFR which is only involved in incorporation of ABC and not Berlinair.
According to me Lundgren should have won the suit because:
- there is no such mention that the contract between Lundgren and Klinicki doesn't allow them to incorporate another company with some other party.
- both the ABC and Berlinair are not sharing any resources with each other
- the claim of Klinicki to reimburse profits of ABC to Berlinair are not justified just because both of them become their competitors.
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