Annie Baker and, her friend, Paula Accountant, decide to go into business together. Annie Baker makes excellent cupcakes, as recently seen on “Cupcake Wars.” Since the airing of the show, customers have been calling Annie off the hook. Paula Accountant, whose accounting office is next door, has noticed the huge lines outside Annie’s little rental shop. Always one to capitalize on a good opportunity, Paula approaches Annie and asks her if she is interested in owning her own shop and making her amazing cupcakes on a larger scale.
Annie is, of course, very excited at this exciting opportunity. However, she is upfront with Paula. She has no money. The rental office and equipment cost her so much money, she doesn’t have any finances to add to the partnership.
Paula, remembering the huge lines, tells Annie not to worry about it. Paula is willing to put all the money up front, as long as Annie will do the baking full time in the shop. They will split the profits.
With this understanding, the two go into business. The first two weeks, business continues to grow at a rapid pace. Annie is working 60 hours per week just to keep cupcakes on the shelves. The demand for her cupcakes is insane.
Paula, ever the entrepreneur, decides that they need an even bigger shop. She finds a new place and convinces Annie that they need a huge sign advertising that Annie is the famous “Cupcake Wars” baker. Annie likes the sound of that and agrees.
Within 30 days, they have given notice on the old place and moved everything into the new shop. Paula arranges for a huge sign that says “Annie’s Famous Cupcakes” on it. In addition, Paula decides Annie needs a larger oven. Without consulting Annie, Paula orders a much larger oven and lots of top line kitchen equipment so Annie can keep up with all the orders. Annie is pleasantly surprised but thinks Paula is spending an excessive amount of money.
Within a few weeks, Paula, overeager for success, has put in $20,000 of her own money to the business. Annie has not put in any money, but continues to work 60 hours per week, every week, to keep up with orders. At this point, all the cupcake money is going to paying down the $20,000 that Paula has given up front. The friends meant to enter a written agreement but got so excited about the business that they kept putting it off. Who has time for a written agreement when you have cupcakes to bake?
Right when the business was at its peak, COVID hits. In the state of Fancy Land, the governor orders all nonessential businesses to close. Irate, Paula immediately hires a lawyer for $2000 to argue that cupcakes were essential but eventually loses.
Now, eight months after the move to the new bakery, the business has zero income. Even worse, it looks like the order will remain in effect for at least six months. Paula has no more cash. Annie tried to continue baking at her home but got shut down.
Paula’s lawyer has now sent Annie a demand letter for the $22,000 she says she loaned to Annie’s business. The letter demands the $20,000 that Paula used to get the new space, the new sign, and other items that Annie may or may not have known about. In addition, she wants to reimbursed the $2000 paid to her lawyer for unsuccessfully arguing that cupcakes are essential.
Annie is shocked. She had put in all that work and effort based on their verbal agreement. She is stunned that Paula, her friend, would now claim it was a loan. Due to the shutdown, she has no money for a lawyer.
Annie hears you are a lawyer who does not charge much. She pays you a small amount of money to help her out. She is clear she has no more money.
For this assignment, prepare a business letter to Annie which outlines the following:
Learning Experience: What went wrong? What could Annie have done to prevent this?
Potential Liability: Based on the fact scenario, if Annie goes to court, what could she lose? What verdicts are possible? How much will litigation cost? Discuss possibilities as well as reasons for potential liability.
ADR: Annie can’t afford litigation. What are the alternatives? Describe at least three alternatives in detail and explain the pros and cons, as they apply to Annie’s unique situation.