Business Law- Milhouse v. Techno-Corp.

Facts of the case

Techno-Corp. was authorized by its' Articles to issue 200,000 shares of stock. Mallory, six of his associates and forty small investors bought different number of shares. Mallory served as both President and Chairman of the Board of Techno-Corp. Formal directors meetings were never held. Mallory had express authority to borrow money for the corporation. Mallory knew that Techno-Corp's finances were shaky, but did not inform Milhouse regarding the financial situation while borrowing $1 million from Milhouse.

Action

Mallory borrowed $1 million (unsecured loan) from Milhouse in the corporation's name without informing the unstable financial situation of Techno-Corp. Milhouse has been unable to obtain repayment of his loan from Techno-Corp as the loan was unsecured and he did not had any collateral or security.

Issue or the question of law

Will Milhouse be able to obtain repayment from anyone else?

Rule of Law

According to the U.S. law a loan (secured or unsecured) must be repaid by the same person/ corporation who borrowed the debt. This information can be found in the contract between the debtor and the creditor, which is signed by both the parties after full verification of the person/corporation borrowing the money. Since, Milhouse gave an unsecured loan to Techno-Corp. Therefore, the only security for Milhouse is the personal guarantee of the borrower i.e. creditworthiness of Techno-Corp. The lender has diminutive options for debt recovery if the person/corporation defaults on the loan that is unsecured. According to U.S law, in a situation involving unsecured loans, fraud might comprise of false tax or employers records, income reports that highlight preceding year's income amounts. As Mallory did not informed Milhouse regarding the shaky financial situation of Techno-Corp, this could be considered as fraud on part of Mallory. In addition to this, according to the U.S. law, only the evidence regarding ...