Final Exam Flashcards

1
Q

If a corporation is owned by three individuals who wish to avoid “double taxation,” they might consider all of the following except:

A

Requesting a double taxation waiver from the IRS for a closely held corporation.

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2
Q

Which of the following would NOT be eligible to form an S corporation?

A

Two individual founders who each would be shareholders in the corporation and a venture capital firm that would invest in the corporation and be the third shareholder in the corporation.

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3
Q

The idea that profits in a corporation are taxed once at the corporate level and again if the corporation issues dividends is commonly known as:

A

Double Taxation.

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4
Q

Ashley, Boden and Candice are the sole shareholders in Ping Pong Palace, a Delaware C-corporation. Ping Pong Palace provides venues that serve alcoholic beverages and allow patrons to play ping-pong, drink, and socialize. Ashley, Boden and Candice all work full time in the operation and management of Ping Pong Palace. In its first year of operation, Ping Pong Palace made $90,000 before paying any money to Ashley, Boden and Candice. Prior to the end of its first year, Ping Pong Palace provided Ashley, Boden and Candice, each a payment of $30,000. Would the $30,000 payments be subject to double taxation?

A

The $30,000 payments would be subject to double taxation if they were paid as dividends but not if they were paid as salary.

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5
Q

Which of the following is likely the best example of an organization that involves centralized management?

A

A Delaware publicly traded corporation.

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6
Q

Andrea Attorney is hired by the president of ABC Corporation to represent ABC Corporation in a major litigation. The decision to retain Andrea is ratified by ABC Corporation’s board of directors. Who does Andrea represent?

A

ABC Corporation (not the directors or officers).

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7
Q

Andrew is Sylvia’s full time assistant. Sylvia instructs Andrew to order three brand new computers from Giant Computer Company, Inc (“GCC”). Sylvia provides Andrew with all of her personal information, including her credit card number, date of birth, home address and all relevant passwords. She also emails a letter to GCC, authorizing Andrew to make computer purchases on her behalf in amounts up to $10,000 in any calendar year. In January Andrew orders three refurbished computers from GCC in Sylvia’s name, for a total purchase price of $5,000. When Andrew purchases them, he is told that all purchases of refurbished computers are nonrefundable, but Andrew is so excited to get them for half price he agrees to the deal without talking to Sylvia first. When Sylvia sees that the computers are refurbished, she is furious. She calls GCC and demands that she be allowed to return the refurbished computers. GCC says, “A deal is a deal. We will not refund your money.” Sylvia calls them some names, posts an angry review online, and hangs up. Is Sylvia bound to pay GCC for the computers?

A

Yes, because Andrew had authority to act on her behalf.

Andrew acted with apparent authority that was created by Sylvia in her letter to GCC and by providing Andrew with her personal information to complete the purchase.

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8
Q

Andrew is Sylvia’s full time assistant. Sylvia instructs Andrew to order three brand new computers from Giant Computer Company, Inc. (“GCC”). In January Andrew orders three refurbished computers in Sylvia’s name from GCC for a total purchase price of $5,000. When he purchases them, he is told that all purchases of refurbished computers are nonrefundable, but Andrew is so excited to get them for half price he agrees to the deal without talking to Sylvia first. When Sylvia sees that the computers are refurbished, she is furious. She calls GCC and demands that she be allowed to return the refurbished computers, but GCC says, “A deal is a deal. We will not refund your money.” Sylvia yells at Andrew and tells him to just unpack and set up the refurbished computers. When Andrew unpacks the refurbished computers, he is so mad that Sylvia has yelled at him that, instead of carefully unpacking the boxes, he negligently throws, what he believes to be, empty boxes across the office toward an empty corner. Andrew is so frustrated that he does not realize a window is open, and a few of the boxes, which unfortunately still have some equipment in them, sail across the office and out the 10th story window. One of those boxes lands on a man name Harry who is walking by the window. Harry needs seven stitches and misses a few days of work. Assuming that negligent behavior is prohibited under the terms of Andrew’s employment and Andrew’s actions (i.e. carelessly throwing the boxes toward the corner of the office) were not authorized by Sylvia, from whom can Harry likely recover in a suit for the tort?

A

Andrew directly and Sylvia vicariously through respondeat superior.

Since Harry can recover from both Andrew and Sylvia since Andrew was acting as Sylvia’s agent within the scope of his employment, and employers are vicariously liable for the torts of their employees committed within the scope of employment.

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9
Q

Andrew is Sylvia’s full time assistant. Sylvia instructs Andrew to order three brand new computers from Giant Computer Company, Inc. (“GCC”). Sylvia provides Andrew with all of her personal information, including her credit card number, date of birth, home address and relevant passwords. She also emails a letter to GCC, authorizing Andrew to make computer purchases on her behalf in amounts up to $10,000 in any calendar year. In January Andrew orders three refurbished computers from GCC in Sylvia’s name, for a total purchase price of $5,000. When Andrew purchases them, he is told that all purchases of refurbished computers are nonrefundable, but Andrew is so excited to get them for half price he agrees to the deal without talking to Sylvia first. When Sylvia sees that the computers are refurbished, she is furious. Sylvia fires Andrew, and Andrew is so mad that he takes Sylvia’s personal information, calls GCC again, and buys himself a brand new computer for $3,000 to compensate himself for his lost job. Sylvia does not discover the unauthorized computer purchase until Andrew has received his new computer and left town. Assuming that no one can find Andrew, is Sylvia or GCC going to bear the cost of Andrew’s actions?

A

Sylvia, assuming that GCC had no notice that Andrew had been fired at the time of his computer purchase.

Assuming that GCC had no notice about Andrew’s firing, Andrew is still acting with apparent authority that was created by Sylvia in her letter to GCC.

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10
Q

Andrew is Sylvia’s full time assistant. Sylvia instructs Andrew to order three brand new computers from Giant Computer Company, Inc. (“GCC”). Sylvia provides Andrew with her personal information and emails a letter to GCC, authorizing Andrew to make computer purchases on her behalf in amounts up to $10,000 in any calendar year. In January Andrew orders three refurbished computers from GCC in Sylvia’s name, for a total purchase price of $5,000. When Andrew purchases them, he is told that all purchases of refurbished computers are nonrefundable, but Andrew is so excited to get them for half price he agrees to the deal without talking to Sylvia first. When Sylvia sees that the computers are refurbished, she is furious. She calls GCC and demands that she be allowed to return the refurbished computers. GCC says, “A deal is a deal. We will not refund your money.” Sylvia fires Andrew, who leaves town and does not provide Sylvia with any contact information. Eventually, Sylvia decides to try out the refurbished computers. Two of them work fine, but one of them will not work at all. Each computer came with a 60-day warranty, and it has only been 45 days since the purchase. Sylvia asks GCC to service or exchange the broken computer under the terms of the warranty. GCC refuses. GCC says that they had no deal with Sylvia. They made their deal with Andrew, and the warranty is “nontransferable”. Sylvia explains that Andrew no longer works for her, and she has no way to contact him. GCC continues to refuse to fix Sylvia’s computer. Which of the following is the most accurate statement about Sylvia’s rights?

A

GCC is bound to Sylvia by the agreement, and Sylvia can enforce her warranty rights.

Since Andrew was acting as Sylvia’s agent (whether through apparent authority or through ratification by Sylvia) and created a binding agreement between GCC and Andrew’s principal, Sylvia, that may be enforced by either party.

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11
Q

Annie is Paul’s agent. Paul instructs Annie to enter into a contract with Toni on Paul’s behalf. Annie identifies herself to Toni as Paul’s agent and then enters into the contract requested by Paul, signing the contract as “Annie, agent for Paul.” Who is bound to Toni?

A

Paul alone.

Annie is acting with actual authority for a disclosed principal, so only Paul would be liable under the contract with Toni.

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12
Q

Marius makes a deal to purchase a great work of art from a very respected artist, named Cossette, on behalf of Miserable Corporation. Marius tells the artist that he is purchasing the picture for Miserable Corporation so the artist should send the bill to Miserable. No one at Miserable Corporation has ever heard of Marius, and Marius had no authority to make the deal. When the picture arrives at Miserable’s headquarters in Seattle, along with a bill for $52,000, Hugo, Miserable’s President says, “I love this painting. I don’t care who purchased it. We are going to keep it and pay the bill.” Two weeks later the painting is ruined, because Cossette used water colors and the moist climate in Seattle has caused the colors to run together in a big ugly mess. Miserable sues Cossette for the $52,000 it paid for the painting. Cossette acknowledges that she was negligent in her selection of paint, but says that Marius has a claim against her not Miserable, and Marius loves her and would never sue. Who wins?

A

Miserable, because it did ratify the agreement.

Miserable, through its agent Hugo’s actions, expressly ratified the agreement, and therefore, Miserable has the right to enforce the agreement made by Marius as if Marius had authority to act on Miserable’s behalf at the time the agreement with Cossette was made.

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13
Q

A works for P as a full time employee. P runs a clothing store, and A’s job is to purchase all of the inventory for sale in P’s store from various manufactures. Unfortunately, A only likes to buy shoes, not pants, jackets, sweaters, hats, etc. which P also sells. P instructs A not to buy any more shoes. P gives A his credit card and writes on a post-it note on the back, “Do not sell this man any more shoes.” A goes shopping, but just can’t help himself; he throws the post it note away and buys 500 shoes for the store from Van Rebok. P is furious and refuses to pay. Is P liable for the shoes?

A

Yes, because A had apparent authority to purchase the shoes.

Even though A did not have actual authority to purchase the 500 shoes, he probably had apparent authority since (i) P gave A P’s credit card; (ii) A had been allowed to buy shoes for P in the past; and (iii) a post-it note that can be easily removed is not an effect means of providing notice to third party shoe sellers.

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14
Q

Ken goes to a Fancy Car dealership and buys a brand new car. As he is about to drive off the lot, a man in a nice suit with a name-tag on his lapel that says “Fred” approaches Ken. Fred says, “Hi, I work for Fancy Car as a warranty specialist. If you pay me $250 before you leave today, I can double your warranty on the car.” Ken says, “That sounds great, can you show me documentation?” Fred replies, “Sure. I just need your name and vehicle ID number from your purchase document, and I will provide you with everything by email. You have 48 hours to reject the deal and, if you do, you will receive a full refund. Of course, I will give you a receipt now, and if you can pay in cash, we give you an additional 20% discount down to $200.” Ken says, “You’ve got a deal!” He pays Fred $200 in cash gets a receipt and leaves. When Ken does not receive paperwork, he calls the Fancy Car dealership and is told, “I’m sorry Ken. There is nobody named Fred who works here. It sounds like you were swindled.” Ken says, “No, I’m sorry it sounds like you have been committed to a warranty by a stranger who you should have kept off your lot.” Under what theory will Ken have the best chance to prevail in his suit to enforce the “extended warranty?”

A

Estoppel.

Since Ken might be able to show that negligent acts or omissions of the Fancy Car dealership created the appearance that Fred had authority to act on behalf of the dealership and Ken, in good faith, reasonably relied and altered his position (by paying cash) based upon on that appearance of authority.

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15
Q

The Bagel Factory is a retail food business that sells fresh bagels and related food products, gourmet coffee and other beverages at its store. The Bagel Factory’s slogan is: “All our bagels were baked fresh today. If you don’t want fresh food, go away.” The city restaurant regulations prohibit the Bagel Factory from selling food at any location other than its store. So, the Bagel Factory has arranged for the leftover bagels to be donated at the end of each day to a local shelter for people struggling with homelessness. The Bagel Factory hires Ethan to bring the leftover bagels to the shelter at the end of each day. One day, Ethan arrives at the shelter a bit later than usual and finds all of the doors locked. Ethan tries to get someone to open the door, but the shelter is closed for the night. Ethan does not want to waste the bagels, so he drives to a night club that he knows will be open. Ethan sells the bagels to people leaving the club for 50 cents a bagel. He does not identify himself or the bagels as having any connection to the Bagel Factory; he makes $100 and goes home. If the Bagel Factory claims the $100 Ethan made selling the bagels, will Ethan be allowed to keep the $100?

A

No, Ethan may not keep the $100 because he is not allowed to make a secret profit from the subject matter of the agency.

Since Ethan may neither acquire a material benefit from a third party in connection with his position nor use property of the Bagel Factory for the Ethan’s own proposes. So, Ethan may not keep the $100.

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16
Q

Pauline owns and operates the Sweet Treats candy store on Main Street, where Adam works as a junior manager. Since Adam is also a student, he only works three, four-hour shifts each week. Adam’s hours vary, but he works approximately 12 hours each week and is paid $15 per hour. One day while Adam is leaving his apartment to go to his shift at Sweet Treats, he sees Vince. Adam has hated Vince since the third grade, when Vince pushed Adam into some bushes in front of the whole class. Adam sees Vince and knows this is Adam’s chance to get revenge. He sneaks up behind Vince and pushes Vince into a large rose bush. Unfortunately, there are bees in the rose bush and Vince, who is allergic, is stung several times. Adam says “Ha! Now we’re even.” Vince says “Call 911 you idiot. I’m allergic to bees.” Adam calls 911 and says, “I will wait with you until the ambulance comes, but it will make me late for my job at Sweet Treats.” Adam waits, and after the ambulance takes Vince away, Adam goes to work his 4-hour shift at Sweet Treats. When Vince gets out of the hospital, he sues Adam and also names Sweet Treats, claiming that Sweet Treats is vicariously liable for the torts of its employee, Adam. Is it likely that Sweet Treats will be liable to Vince for the injuries resulting from Adam’s actions?

A

No. Adam’s actions were not taken while he was at work, were not foreseeable, and were not taken to serve Sweet Treats’ interests.

Since Adam’s actions were independent, did not occur at work and had no connection to Sweet Dreams, so Sweet Dreams would not be vicariously liable.

17
Q

Pauline owns and operates the Sweet Dreams candy store on Main Street, where Abe works as a part-time employee. When Abe gets to work one day. Abe sees a Sweet Dreams’ customer, Tom, whom, Abe believes has stolen a chocolate bar from Sweet Dreams. Although Sweet Dreams instructs everyone who works in the store to never use any force whatsoever with any customer, Abe follows Tom out of the store, pushes him to the ground and searches Tom’s pockets. It turns out that Tom has a cell phone case that looks like a candy bar, and Tom had not taken anything from Sweet Dreams. Abe apologizes, but Tom says, “You are out of control; you injured my wrist when you pushed me down, and I am going to sue you and this store.” Assuming Tom has a claim against Abe, is it likely that he can extend that claim to hold Sweet Dreams and Pauline vicariously liable for Abe’s actions?

A

Yes, because Abe was acting within the scope of his duties.

Since Abe was working for Sweet Dreams and pursued Abe with the intention of serving Sweet Dream’s interests. An employer is vicariously liable for the actions of an employee who wrongfully injures someone in a mistaken effort to prevent shoplifting.

18
Q

Martial Arts Studio (the “Studio”) is a huge fitness facility that allows many different instructors to use the Studio to give private lessons. The Studio also conducts a large number of fitness and training classes and sells memberships through which individuals may sign up for a series of Studio classes. Jonah is a martial arts instructor who gives private lessons at the Studio, and, occasionally will teach one of the Studio’s martial arts fitness classes. One day, Jonah is sitting behind the front desk at the Studio talking to his friend Harry, who is an hourly Studio employee. Cameron Clueless walks into the Studio and asks for assistance. Jonah offers to show Cameron around the Studio. Cameron tells Jonah that Cameron would love to learn martial arts. Jonah says: “I will give you a full year of private lessons for $1,200, and, if you write me a check today, during that year, you can also attend as many fitness classes as you want at the Studio.” The Studio has never given Jonah the right to offer any Studio classes, but Jonah knows that the Studio rarely checks identification of the people attending its classes and does not think that the Studio will find out that Cameron has not paid for fitness classes. In fact, Cameron does show up for a few Studio fitness classes, and, at first, no one prevents Cameron from attending the classes. However, within the first few months of Cameron’s year of lessons, the Studio implements a new strict policy of checking identification. When Cameron shows up for a fitness class, a Studio employee tells Cameron that Cameron is not authorized to take any Studio Classes, and there is a fee of $20 per class. If Cameron wants to continue taking classes without paying any additional fees, Cameron’s best argument is that:

A

Jonah had the apparent authority to offer Cameron free Studio classes.

Since the Studio allowed Jonah to sit behind the front desk and to give tours of the facility as though Jonah were an employee of the Studio, and it was reasonable for Cameron to believe that Jonah had the authority to offer free Studio classes.

19
Q

Bob and Andrew form a corporation called Shoes and Socks, Inc. (“SSI”). SSI sells shoes and socks in its store on Main Street. Bob and Andrew are both shareholders in SSI, each owning 50% of the stock. Andrew is the president and works in the SSI store. Bob does not work for SSI; he is only a shareholder. One day, Fred comes into the SSI store looking for shoes. Andrew is working that day and suggests that Fred try on a pair of the newest shoes from Fad Footwear. When Andrew goes to get the shoes, he sees the warning on the Fad Footwear box that says: “THE SOLES OF THESE SHOES ARE COATED WITH A PROTECTIVE COVER THAT IS VERY SLIPPERY. DO NOT WEAR UNTIL YOU HAVE REMOVED THE PROTECTIVE COVER!!!!” However, Andrew gives the shoes to Fred without removing the protective cover because Andrew does not want to remove the protective cover until the shoes are actually sold. He tells Fred to put on the shoes and walk around the store and see how they feel. Andrew does not warn Fred about the protective cover or that the shoes might be slippery. Fred puts on the shoes, takes three steps, slips (because the protective cover is indeed very slippery) and breaks his ankle. Fred wants to sue. Assuming that Andrew was indeed negligent, against which parties would Fred have a claim?

A

Fred will have a claim against SSI and against Andrew but not against Bob.

Fred will have a claim against both SSI AND against Andrew. SSI will be liable because its agent, Andrew, acting on SSI’s behalf, committed negligence. Andrew will be liable because he committed negligence, and a corporation does not protect an individual from liability for his own negligence. Bob will not be liable because he is protected by the corporate structure.

20
Q

Patty owns a restaurant that makes great hamburgers. She hires Adam as a cook. One day Patty asks Adam to go out and buy ground beef to make hamburgers. Adam goes to the store to buy ground beef. At the store he charges the meat to Patty’s account. As he is leaving the store, the manager, Tania, chases after Adam and says, “Hey, you can’t charge that meat to Patty’s account unless you have written authorization. You need to pay for it now.” Adam explains that he is authorized, but Tania insists that Adam was not authorized to charge the meat. Adam finally says, “I’m sorry you don’t believe me, but I have to go.” Tania yells, “Stop thief” as Adam drives away. Tania calls the police and reports a theft. When Adam gets back to Patty’s restaurant, Patty tells Adam that she meant to tell him to buy ground turkey, since it is turkey burger night at Patty’s restaurant. Patty says she can’t use the ground beef. After Adam tells Patty about Tania’s behavior, Patty decides that she is not obligated to pay for the ground beef. If Tania (on behalf of the store) sues Patty for the cost of the ground beef, what is the likely result?

A

Patty will have to pay because Adam had actual authority.

Since Patty told Adam to go buy ground beef. (It does not matter that she made a mistake and really wanted turkey.) Adam had actual authority, so Patty will be liable for the ground beef.

21
Q

Asher is Penny’s agent. In the scope of Asher’s employment for Penny, Asher commits a tort, injuring Ted. Ted sues Penny, and a court finds Penny is vicariously liable for Ted’s injuries in an amount of $100,000. Penny then sues Asher to recover the $100,000. Will Asher or Penny likely prevail in the suit?

A

Penny will win because Asher is liable for his negligent acts even if he was acting as an agent.

Asher is liable for his own negligence and the costs that Penny incurred as a direct result of that negligence, even if the tort occurred within the scope of Asher’s employment.

22
Q

Axel is an employee working for Bread Maker, Inc. One of Axel’s job responsibilities is to purchase ingredients from various suppliers. One of Bread Maker’s wheat suppliers, Pure Wheat Company, has a “side deal” with Axel, under which Pure Wheat Company (to induce Axel to buy wheat from Pure Wheat Company rather than from other suppliers) pays Axel $15 in cash for every metric ton of wheat that Axel purchases from Pure Wheat Company on behalf of Bread Maker. Bread Maker does not learn about this arrangement between Axel and Pure Wheat Company for several years. When Bread Maker does discover the “side deal,” Bread Maker sues Axel to recover the $60,000 that Axel has received from Pure Wheat Company under the “side deal.” Will Axel be liable to Bread Maker?

A

Axel will be liable to pay the $60,000 to Bread Maker even if Bread Maker cannot show that it has suffered any direct financial loss as a result of the “side deal.”

Since Axel, as an agent, is liable to his principal, Bread Maker, for any profits Axel makes in connection with transactions conducted on behalf of Bread Maker (such as the purchase of wheat) through Axel’s position, even if Bread Maker did not suffer a financial loss as a result of the side deal.

23
Q

Fred, Ginger, Bing and Bob are partners in a software company. The partnership agreement provides that a majority of the partners may vote to expel any partner for any reason. One day, Bob wears pajamas on a Zoom call with a client. Fred, Ginger and Bing, who have been warning Bob about his slovenly appearance for quite some time and the negative effect it is having on clients and customers, vote to expel Bob. Bob sues, claiming that the other 3 partners breached their fiduciary duties to him. Is Bob likely to win?

A

No, Bob can be expelled for a slovenly appearance, provided the other partners acted in good faith.

Since the other partners had a contractual right to expel Bob, they may do so, provided that they did not act in bad faith.

24
Q

Chip is planning to form a corporation to deliver groceries from small family owned markets. Chip’s attorney tells him that the corporation will be formed in two days. Four days later Chip hires a driver and starts taking delivery orders. The next day, Chip’s driver hits a pedestrian while delivering groceries for the corporation, and the pedestrian sues Chip personally. It turns out that Chip’s corporation was never formed because Chip’s lawyer was hospitalized. None of this information was known to Chip until after the pedestrian was hit. In the suit by the pedestrian against Chip:

A

Chip may be able to avoid personal liability by arguing that he had a de facto corporation.

Chip made a good faith, substantial effort to comply with the state’s incorporation statute, had a good faith belief that he had actually formed a corporation and acted as though he had, in fact, formed a corporation.

25
Q

Before, they form XYZ Records, Inc., George, Paul, Ringo & John enter into a contract with Exploitation, Inc. on behalf of “XYZ Records, Inc., a proposed corporation.” The contract provides that XYZ Records will provide Exploitation with 10 new songs per year for the next 3 years. XYZ, Records, Inc. is formed shortly after the contract is signed and ratifies the Exploitation contract. George, Paul, Ringo & John are the only shareholders. But, XYZ Records only provides 8 songs the first year and then no songs thereafter. Who is potentially liable to Exploitation for breach of the contract?

A

XYZ Records and George, Paul, Ringo and John.

XYZ Records AND George, Paul, Ringo and John are potentially liable since George, Paul, Ringo and John signed the agreement as promoters, and XYZ Records ratified the agreement, and there was no novation releasing George, Paul, Ringo and John from liability to Exploitation.

26
Q

When is a corporation formed?

A

Upon the filing of the Articles (or Certificate) of Incorporation.

27
Q

When forming a corporation, which corporate document(s) must be filed with the Secretary of State’s office in the state that the corporation wishes to form?

A

Articles (or Certificate) of Incorporation, only.

28
Q

Each director of a corporation under the Model Business Corporations Act must be:

A

An individual.

(not a legal person)

29
Q

Hector and Hans are co-promoters working together to form H&H Corp. Before H&H Corp. is formed, Hector and Hans sign a lease agreement with Linda Landlord. Hans and Hector sign the lease: “Hans and Hector, promoters for H&H Corp., a corporation to be formed.” Once H&H is formed, it formally adopts the lease and begins making payments on the lease. Six months later, H&H suffers a financial reversal and cannot pay its lease obligations. From whom may Linda seek to recover under the lease?

A

Either from Hans and Hector or from H&H Corp.

Since a party to a contract with promoters on behalf of a corporation that has not been formed at the time of the contract, may proceed either against the promoters or against the corporation that has adopted the contract.

30
Q

Hector and Hans are co-promoters working together to form H&H Corp. Before H&H Corp. is formed, Hans and Hector negotiate an agreement with Ryan to print signs for H&H Corp. Only one signature is required, so Hector does not sign the agreement, and Hans signs the agreement as “Hans, promoter for H&H Corp., a corporation to be formed.” Ryan prints the signs but H&H Corp. is never formed. From whom can Ryan likely collect payment for the signs?

A

Hans and possibly Hector as a co-promoter.

Since Ryan will be able to collect from Hans since a promoter is bound by any contract entered into on behalf of a corporation that has not yet been formed, unless there is a clear intent that the promoter not be bound or the circumstances are such that the promoter could not perform the agreement. Hector could possibly be liable as a “co-promoter” under partnership principles.

31
Q

Orange, Inc. borrows money from Paul and is unable to pay him back because Orange, Inc. has made some bad, but not negligent, business decisions and no longer has sufficient capital to pay its debts. Assuming that Orange, Inc. has followed the requisite corporate formalities, whom can Paul successfully sue?

A

Orange, Inc. only.

Orange, Inc. is a corporation so liability is limited to the corporation itself and does not extend to its shareholders.

32
Q

A shareholder of a corporation wants to minimize the risk of having the corporation’s corporate veil pierced. Please select the best advice from among the following alternatives.

A

Make sure that the corporation observes all corporate formalities.

Since a corporation that observes the corporate formalities should not be subject to veil piercing since a plaintiff would not be able to show a unity of interest.

33
Q

Harry and Jack together own 100% of Blue Box, Inc. Harry owns 72% and Jack owns 28%. Allison has a judgment against Harry, which Harry cannot pay. Allison argues that she should be allowed to “reverse pierce” Blue Box, Inc. to get at some of the assets. If a court were to permit Allison to reverse pierce then, as a result, she would:

A

Be able to collect on an equal footing with Blue Box, Inc.’s similarly situated creditors

34
Q

Zoe decides to form a fishing business that will rent boats and equipment to local fishermen. In order to limit her liability, she forms separate corporations to own each of her 14 boats and also separate corporations to own the equipment, warehouse and other facilities, respectively. There are 17 separate corporations in all, and Zoe is the sole shareholder in each corporation. Zoe is diligent regarding corporate formalities within each corporation, but, in order to make the administration less complicated, all 17 corporations share the same bank account, warehouse, dock, scheduling, maintenance, rental, and office facilities. One day one of the boat’s steering fails due to poor maintenance and the boat collides with a canoe. The two canoe paddlers, Sara and Max, are injured and want to sue to recover for their damages. However, the corporation that owned the boat (named “Zboat #6, Inc.”) has assets of approximately $50,000 and Sara and Max anticipate that their damages may be closer to $100,000. If there is no wrongdoing, other than may be inferred from the statements above, from which individuals and/or entities are Sara and Max likely to be able to recover their damages?

A

From all 17 corporations under a theory of enterprise liability.

Since the 17 corporations do not seem to be operated as separate entities, and the respective corporation’s assets are intermingled for use toward a common business purpose.

35
Q

Gina and Ida form a corporation called Lumber Sales, Inc. (“LSI”). LSI sells lumber out of its lumberyard on Wood Road. Gina and Ida are both shareholders in LSI, each owning 50% of the stock. Ida is the president and works in the LSI lumberyard. Gina does not work for LSI; she is only a shareholder. The property used for LSI’s lumberyard is leased from Lexi Landlord. LSI’s business is not going well, and LSI defaults on its lease. LSI is evicted and Lexi sues LSI and obtains a judgment for $100,000. Lexi also discovers that LSI never had a corporate meeting in the five years since it was formed and never issued stock. Gina and Ida did each contribute $25,000 when LSI was formed. Since LSI has no money, Lexi would like to pierce LSI’s corporate veil to hold Gina and Ida personally liable for LSI’s $100,000 judgment. If Lexi’s were to bring a suit seeking to pierce LSI’s corporate veil, the likely result would be:

A

Lexi would be unsuccessful unless she can show that Gina and Ida did more than fail to hold meetings and to issue stock.

Since, in order to pierce the corporate veil, most courts will require a showing of a unity of interest (typically shown by a failure to follow formalities) AND that failure to pierce the veil would sanction a fraud or promote injustice. Since there is no indication here of injustice or “fraud-like” conduct, it is unlikely that Lexi would be successful in her efforts to pierce the corporate veil.

36
Q

Darren and Darleen want to start a business that develops, produces and sells household appliances. Darren and Darleen form D&D Corp. to operate this business. Darren and Darleen file Articles of Incorporation for D&D Corp. D&D Corp. has an initial meeting and adopts bylaws. D&D Corp. issues a total of 100 shares of stock, 50 shares to Daren and 50 shares to Darleen, in exchange for the $100 dollars each that Daren and Darleen contribute to D&D Corp. In order to finance its operations D&D Corp. borrows $250,000 from a local bank. D&D Corp. follows some corporate formalities but, after its initial organizational meeting, does not conduct meetings. D&D does not carry liability insurance. After about 15 months in business, D&D breaches a contract with Petra, and Petra sues D&D Corp. and Darren and Darleen personally. One of Petra’s justifications to support her claim against Darren and Darleen personally is that D&D Corp. was not adequately capitalized. Is Petra likely to convince a court that D&D Corp. was not adequately capitalized?

A

No, because D&D Corp. borrowed $250,000 and loans are included in capitalization.

Since the $250,000 loan would be included in the capitalization of the corporation given that both money that is invested AND money that is borrowed may be used to satisfy obligations of the corporation.

37
Q

Bob, a multi-millionaire, forms a corporation called Art, Inc. in order to operate an art gallery that buys and sells rare works of art. Bob contributes $5 million to Art in exchange for his shares in the corporation. Art uses most of the $5 million to purchase rare works of art. Art meticulously follows all of the corporate formalities. However, because Bob thinks that insurance is a waste of money and Bob is the President of Art, Art does not purchase any insurance. Unfortunately, an unexpected storm causes a flood, which destroys Art’s gallery and all of the artwork. A few days after the storm, a curious individual named Phil, enters what is left of the gallery in an effort to see what damaged artwork looks like. While on the Art gallery premises, Phil is injured. Phil sues Art, claiming that Art should have posted caution signs. The court finds that an Art employee who was instructed to post caution signs failed to do so, and, Phil gets a judgment against Art for $75,000. Since Art has no remaining assets and Bob is rich, Phil brings a suit seeking to hold Bob personally liable for the $75,000 as the “alter ego” of Art. In a suit by Phil, should Phil be allowed to pierce Art’s corporate veil?

A

Phil should not be allowed to pierce Art’s corporate veil because corporate formalities were observed and Art was adequately capitalized.

Since piercing the corporate veil requires a unity of interest. Here, the facts that Art followed the corporate formalities and was adequately capitalized should withstand Phil’s efforts to pierce the veil. (Note that absent a specific statutory mandate, there is no requirement that corporations carry insurance, and $5 million is more than adequate capitalization.)

38
Q

Corporation A has five subsidiary corporations: Q, Inc., R, Inc., S, Inc., T, Inc. and U, Inc. (respectively, “Q”, “R”, “S”, “T” and “U”). Each of the subsidiary corporations operates a different restaurant. Corporation A hires the chefs for each of the subsidiaries and buys all of the food used in each restaurant. Q, R, S, T and U then purchase the food from Corporation A and pay Corporation A for the time that a particular chef works in their restaurant. One day a customer in T, named Charlie, orders a fish dinner in restaurant T. It turns out that T’s refrigerator was not working properly, and the fish had gone bad. Charlie gets sick and sues T. If Charlie also wants to sue Q, R, S, and U, under what theory might he be able to do so?

A

Enterprise liability.

Since the theory by which related subsidiary corporations might be held liable for the obligations of one subsidiary is known as “enterprise liability.”

39
Q

Sandy owns 12% of Square Pants, Inc., a publicly traded clothing manufacturing company. Mr. Krabs would like to eventually acquire control of Square Pants, and he buys all of Sandy’s stock for $20/share even though the other shares of Square Pants, Inc. are trading at $14/share. The difference between the $14/share and $20/share represents a premium of $18 million to Sandy. Patrick is a Square Pants shareholder who wants to sell his shares at a premium as well. Patrick sues Sandy in an effort to recover his pro rata share of the $18 million premium. Would a court likely allow Sandy to keep the $18 million premium?

A

Yes. Sandy would be allowed to keep the entire premium.
At least in the U.S., a shareholder may retain the payment obtained by selling his, her, its, or their shares, even if those shares are sole at a premium and even if that premium is a “control” premium.