Billy Madison is the dimwitted, childish, and spoiled 27-year-old heir to Madison Hotels, a Fortune 500 chain of 650 hotels founded by his father, retiring tycoon Brian Madison. Refusing to study or learn the business as his father wants, Billy spends his days hanging out with his friends, drinking to excess, and causing all manner of disturbances across his family’s estate.
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One evening, Billy ruins an important dinner meeting between Brian and his associates by acting obnoxiously. Brian, fed up, declares that his devious executive vice president Eric Gordon will inherit control of Madison Hotels and by extension the Madison family fortune. When Billy begs Brian to reconsider his decision, as he knows Eric hates him, Brian reveals that he secretly bribed Billy’s schoolteachers to give him passing grades. The two finally compromise: Billy must complete all 12 school grades, with 2 weeks for each grade, to prove he is competent enough to manage the company.
Shortly after enrolling in elementary school, Billy becomes attracted to a 3rd-grade teacher named Veronica Vaughn, who initially ignores him. Nevertheless, Billy successfully progresses through his first 2 grades. He finds himself as one of Veronica’s students in 3rd grade and earns her respect by standing up for Ernie, his friend and classmate. Billy becomes popular among the 3rd graders and misses them as he advances through school. Billy’s progress alarms Eric. Desperate to take over Madison Hotels, he blackmails Billy’s elementary school principal, Max Anderson, into lying that Billy bribed him for passing grades with magazine pictures of Max’s previous career as the “Revolting Blob”, a masked professional wrestler who accidentally killed a man in the ring.
Angered, Brian calls off his deal with Billy and renames Eric as chairman of the company. Billy grows distraught and reverts to his previous carefree lifestyle. Veronica motivates him to return to school, while his grade school classmates convince Max to retract his false accusations, infuriating Eric. Brian agrees to give Billy another chance, but Eric retorts that Billy failed the challenge by not finishing 9th grade within 2 weeks and threatens to sue Brian for breach of contract. Billy intervenes and challenges Eric to an academic decathlon to finally settle their feud, with the winner getting to take over Madison Hotels.
Both men excel in different activities, but Billy manages to take a single-point lead before the contest’s final event, a Jeopardy!-style academic test. Billy gives a completely dimwitted answer for the opening question in the event, but when asked to pick the next category for Eric, chooses business ethics. Eric, being a highly unscrupulous businessman, cannot conceive of an answer and has a nervous breakdown. He aims at Billy with a revolver, but Max (in his wrestling gear) surprises and overpowers him. Eric then tries to kill Veronica with his loose arm before getting shot in the buttock by Danny McGrath, a rifle-wielding madman whom Billy apologized to earlier for bullying him years ago.
At his graduation ceremony, Billy, realizing that he is not mature enough to replace his father, announces he will pass ownership of Madison Hotels to Carl Alphonse, Brian’s more polite and loyal operations manager, before stating his intention to get a teaching certificate. Eric, recently fired by Brian and now walking on crutches due to his wound, can only watch in frustration.
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