On April 5, Handy contracted to purchase land with the
intent of forming a limited liability company (LLC) with
Ginsburg and McKinley for the purpose of building a residen-
tial community on the property. On April 21, they learned
from Coastal, an environmental consulting firm they had
hired, that the property contained federally protected wet-
lands. The presence of wetlands adversely affected the prop-
erty’s value and development potential. Handy, Ginsburg, and
McKinley abandoned construction plans and instead decided
to sell the property. To advertise and promote that sale, they
placed on the property a sign that stated the property had
“Excellent Development Potential.” Unaware of the existence
of wetlands, Pepsi acquired an option to purchase the property
from Handy on August 5. At that time, Willow Creek had not
yet been formed and Handy had not yet purchased the property.
On August 18, Handy, Ginsburg, and McKinley formed Willow
Creek Estates, LLC. During the option period, Pepsi hired
a soil-engineering consultant to conduct an environmental
investigation of the property. In Handy’s written answers to spe-
cific questions from the consultant about the property, Handy
did not disclose that the property contained wetlands or that
Coastal had already performed a written preliminary wetlands
determination the month before. On September 4, Willow
Creek, LLC, took title to the property. Four months later Willow
Creek, LLC, sold the property to Pepsi for more than twice the
amount of its purchase price and did not disclose the existence
of wetlands on the property. After Pepsi learned that the prop-
erty contained wetlands, it brought an action for fraud against
Willow Creek, Handy, Ginsburg, and McKinley.
a. What are the arguments that Handy, Ginsburg, and
McKinley are not individually liable to Pepsi for fraud?
b. What are the arguments that Handy, Ginsburg, and
McKinley are individually liable to Pepsi for fraud?
c. Explain who should prevail.
