Problem 1

Stranger Alter Egos

Jim Hopper (“Hopper”) was the long-time sheriff of the town of Hawkins, Florida. After returning from an unexplained disappearance in the mid-1980s, Hopper retired from the police force and decided to go into the private security business. Unfortunately, since he had been missing for the last 30 years, his credit history was sparse and he had difficulty obtaining financing for his new venture. To solve this problem, Hopper elicited the assistance of four old friends: Mike, Dustin, Lucas and Will and, in January 2015, the company Stranger Things Security, Inc. (“STS”) was formed. Mike, Dustin, Lucas and Will each held 25% of STS’ stock and the four of them comprised the company’s officers and directors. After incorporation, STS and Hopper executed a management agreement pursuant to which Hopper agreed to operate and manage STS in exchange for a base salary and a generous percentage of the company’s revenues.

A few months after incorporation, STS was hired to provide private security for the entirely above board and not remotely suspicious Hawkins Laboratory. To finance the necessary expansion in personnel and security equipment, STS obtained a revolving business line of credit from Upside Down Bank. Hopper negotiated the financing terms with the bank on behalf of STS but the loan documents were executed by Mike in his capacity as an officer of the company. With the security contract and the line of credit in place, the company achieved initial success. Hopper competently operated STS’ business affairs and collected the salary and revenue share contemplated by the management agreement. Mike, Dustin, Lucas and Will held quarterly meetings, maintained corporate formalities and were generally satisfied with the direction of the company.

Things began to change in 2017. Mike, Dustin, Lucas and Will discovered they were more interested in their girlfriends than in their fiduciary duties to STS and their involvement in the company decreased. By the end of the year, Hopper was effectively running STS unchecked. He stopped reporting to Mike, Dustin, Lucas and Will and began to retain all of STS’ profits for himself. The company’s governing documents were never changed to reflect the new circumstances.

In July 2019, Hawkins Laboratory was breached by the Russians. The company blamed STS and terminated its security contract for cause. Shortly thereafter, STS became delinquent in debt service payments to Upside Down Bank. After multiple company checks that were signed by Hopper bounced, Upside Down Bank filed suit against STS and obtained a $1.5 million dollar judgment against the company. Post-judgment discovery revealed that the problems at STS went far beyond losing the Hawkins Laboratory contract. The bank learned that Hopper had depleted the company’s resources through overspending and neglect and that Hopper had covered up his mismanagement by falsifying STS’ financial records during Upside Down Bank’s annual loan reviews.

In the midst of STS’ collapse, Hopper fell behind on his personal home mortgage. To avoid foreclosure, Hopper filed a Chapter 13 bankruptcy petition in the Southern District of Florida. His Chapter 13 plan proposed to cure the mortgage arrearage and to pay all allowed general unsecured claims in full.

Upside Down Bank has filed a proof of claim in Hopper’s Chapter 13 case for $1.5 million dollars. As a basis for the claim, the bank states “Liability under veil piercing theory since Hopper is STS’ alter ego.”

Question 1

Hopper objects to Upside Down Bank’s claim. He argues that STS claim should be disallowed since veil piercing is only a remedy against shareholders under Florida law. How should the Court rule on Hopper’s claim objection.

Question 2

Assume the same facts as above, but that the shareholders of STS were Hoppers’ wife and daughter instead of Mike, Dustin, Lucas and Will. Will that change the outcome of the claim objection?