Final Exam M/C Questions

Question 1

Doctor decided that their medical office needed to be updated and refurbished. On the recommendation of a friend, Doctor reached out to discuss the project with Painter. Doctor explained that they desired for Painter to empty the waiting and patient consult rooms, deep clean the walls, lay drop cloths, paint the walls with a coat of primer, and do any other work reasonably required to accomplish the task. Doctor explained that they would be on site to supervise and provide most of the necessary equipment; however, Painter would be responsible to locate and order the paint and primer from a third party. Painter agreed to do the job as Doctor instructed, and Painter agreed to accept a flat rate at the end of the project. Doctor expressed that, if this went well, Doctor had additional work that they would consider contracting for Painter to perform. The two shook hands and Painter promised to return the next week to complete the job. What is the status of the relationship between Doctor and Painter?

Answer 1

Doctor and Painter are in a principal-agent relationship because Doctor asked Painter to perform services at Doctor’s behest and subject to Doctor’s control and Painter agreed to do so.

Question 2

Homeowner requested Power Washer to come and provide residential power washing services. Power Washer operates a power washing business and books jobs throughout the region. When Power Washer arrived at the home, Homeowner instructed Power Washer as to the scope of the job. P.W. agree to perform the job as instructed. PW supplied their own tools and equipment and maintained their own liability insurance. Homeowner agreed to pay PW half of the price for the job before PW began work and half at the completion of the project. PW told Homeowner that the job should take less than two hours and that they expected to leave promptly upon finishing the work to travel to their second job for the day across town. PW began work, but because they were in a rush, became careless. During the job, PW negligently caused damage to Neighbor’s property. Neighbor filed a lawsuit against Homeowner to recover the damage. Which of the following, if true, would support Neighbor’s lawsuit against Homeowner?
A. Homeowner had never met PW before and was thus negligent in permitting PW to perform services unsupervised.
B. Homeowner remained at the home and monitored PW’s activities, even giving PW instructions for what to do.
C. Homeowner has hired PW in the past to perform work for them.
D. Residential power washing is a low skill job that Homeowner could have performed themself.

Answer 2

B. Homeowner remained at the home and monitored PW’s activities, even giving PW instructions for what to do.

Question 3

Gallery hired Driver to transport a valuable painting from one side of the state to the other. While driving on the interstate, Drive negligently caused a car accident that resulted in severe injury to Family. Family desires to file a lawsuit to recover their damages. Against whom may Family assert claims for liability?

Answer 3

Both Gallery and Driver

Question 4

In anticipation of their yearly holiday gathering, Family hired Chef to cater their family meal. Family instructed the Chef that they wanted an elaborate buffet spread, appetizers, dessert, and a bar. Chef did not work at a restaurant; rather, Chef caters from their home. Family was aware of this and told Chef to do what it took to get the job done. When it came time to do the work, Chef purchased all the food and supplies necessary but quickly realized the job was simply too big for one person. Accordingly, Chef elicited the help of three friends and promised them payment by the hour. When it came time for the family gathering, the friends helped Chef deliver and set up all the food and equipment, and then they worked during the event to replenish food, remove empty dishes, and tend the bar. At the end of the evening, Chef presented Family with an invoice for services. Shocked, Family agreed to pay for all the food and supplies and Chef’s fee, but refused to pay anything to Chef’s friends. Family maintained that Chef had no authority to hire staff. What is Chef’s best argument that Family must pay the friends?
A. Family would be unjustly enriched if it does not pay for the friends.
B. Family is bound to pay the friends because it authorized Chef to hire them.
C. Chef could not have performed the task without help from the friends.
D. Chef has no argument that Family must pay their friends.

Answer 4

B. Family is bound to pay the friends because it authorized Chef to hire them.

Question 5

One day, while playing kickball, Smith fell and broke his leg. Smith’s friends took him to a local emergency room operated by Hillfield Hospital System. All medical personnel wore uniforms with the Hillfield logo on it, and all paperwork indicated that Hillfield was providing emergency medical care. The emergency room physician referred Smith to an orthopedist, also in the HHS. During a consult, the orthopedist, wearing a white coat with the Hillfield logo embroidered on it, recommended that Smith undergo surgery. The orthopedist provided Smith with a pamphlet about the benefits and risks of surgery that included lines such as “Here at HHS, we want you to be fully informed about your medical procedures” and “if you have any questions at all, please do not hesitate to ask your Hillfield medical team.” Smith agreed and scheduled the procedure to take place the following week at a Hillfield Hospital surgical center. During the procedure, the orthopedist committed negligence and caused serious injury to Smith. Smith has filed a lawsuit against the orthopedist and HHS. Hillfield has filed a motion for summary judgment, arguing that the orthopedist is an independent contractor and not an agent of the hospital system. In support of its motion, Hillfield filed the orthopedist’s contract with the hospital, which included the clause “Orthopedist agrees that she is an independent contractor, and not an agent, of HHS.” How should the court rule?

A. Dismiss the lawsuit because the orthopedist was an independent contractor, and thus, the orthopedist’s negligence cannot be attributed to the hospital.
B. Dismiss the lawsuit because the orthopedist’s contract with the hospital establishes that the orthopedist is an independent contractor.
C. Allow the lawsuit to proceed because Smith reasonably believed that the orthopedist was an agent of the hospital.
D. Allow the lawsuit to proceed because it would be bad public policy to not hold hospitals accountable for negligent procedures performed in their facilities.

Answer 5

C. Allow the lawsuit to proceed because Smith reasonably believed that the orthopedist was an agent of the hospital.

Question 6

Lavery was home one day when someone knocked on the door. He answered the door to see a man standing there dressed in a suit. The man introduced himself as “Chip” and explained that he was a sales representative for Acme Co. Chip inquired as to whether Lavery might be interested in purchasing a new set of knives. Chip offered to demonstrate the effectiveness of the knives, and Lavery agreed. Impressed with how sharp and accurate the knives were, Lavery asked Chip to process an order for him. Chip agreed to do so but insisted that the payment was due “up front.” Lavery paid Chip $150 cash, and Chip promised delivery within a week. A few hours later, struck with regret, Lavery looked up Acme Co’s contact information and called to request that his order be canceled and his money be refunded. Lavery spoke with a representative who, to Lavery’s dismay, informed him that Acme Co. did not employ door-to-door salespeople, does not sell knives, and would never take payment in cash up front. Lavery has been hoodwinked. Is Acme Co. liable to refund Lavery’s money?
A. Yes. Chip claimed to be an agent of Acme Co., and thus, Acme Co. is liable for the fraud.
B. Yes, Acme Co. is estopped from denying that Chip had authority to enter into contract on their behalf because they should have had a warning posted on their website reflecting what the customer representative told Lavery.
C. No, because Lavery was reckless in believing that Chip was actually an agent for Acme Co.
D. No, because Lavery’s belief that Chip was an agent for Acme was not traceable to any manifestation from Acme.

Answer 6

D. No, because Lavery’s belief that Chip was an agent for Acme was not traceable to any manifestation from Acme.

Question 7

Big Corp. operates a line of large retail stores and is looking to expand into a new area. Concerned that social activist regularly protest expansion because of worries about how Big Corp. stores impact local, mom and pop stores, and aware that landowners typically inflate asking prices when they find out they are dealing with Big Corp., Big Corp wants to use a secret agent to purchase the land. The secret agent will negotiate the transactions as if the agent were the one who would be paying the purchase price and taking title to the property. In fact, however, Big Corp is funding the the transaction, and the agent will keep the land in escrow until it can be titled in Big Corp’s name. Nobody will know that Big Corp is even involved until the deal has closed. The secret agent approached Nora and offered to buy a 40-acre parcel of real estate that she owned for $300,000. Nora accepted the offer, and the transaction was scheduled to close a week later. After the closing, when Nora saw a sign on the property that a Big Corp store was “coming soon,” she was livid. If she had known she was dealing with Big Corp., she would have doubled the asking price. Does Nora have any basis to seek to void the transaction?
A. Yes, the secret agent deceived Nora as to the true identity of the parties to the transaction.
B. Yes, because Big Corp unfairly benefits from the use of a secret agent.
C. No, because the secret agent had authority to enter into the transaction and bind Big Corp, even though Nora did not know about it.
D. No, because this is just how the market works.

Answer 7

C. No, because the secret agent had authority to enter into the transaction and bind Big Corp, even though Nora did not know about it.

Question 8

Insurance Company contracted with Agent, a licensed attorney with specialized training and experience in real estate law, to permit Agent to write and issue title insurance policies on its behalf. As part of a commercial real estate transaction, Agent performed a title search. Through an act of ordinary negligence, Agent failed to identify that a lien had been recorded against the real property. Agent then issued a commitment for a title insurance policy to Customer on Insurance Company’s behalf indemnifying Customer against any claims on the property. After the transaction was complete, Customer discovered the lien on the property and made a claim for damages against the Insurance Company under the title insurance policy that Agent had issued. An expert opined that most non-attorney title insurance agents would not have discovered the lien, but an agent who was trained as an attorney should have discovered the lien. Assume for purposes of this question that there is no applicable contract, statute, or rule defining the standard of care, that issuing title insurance does not constitute the practice of law, and that most title insurance agents are not attorneys. Has Agent breached any duty owed to Insurance Company under the law of agency?
A. Yes. Under the law of agency, the agent is strictly liable for any loss caused to the principal arising from the agent’s conduct.
B. Yes. Under the law of agency, an agent with special skill or knowledge is held to a higher standard of care.
C. No. Under the law of agency, an agent does not breach its duty of competence to the principal if another agent, in the same or similar circumstances, would have conducted themself in the same way.
D. No. Under the law agency, an agent only breaches its duty of competence to a principal through gross negligence.

Answer 8

B. Yes. Under the law of agency, an agent with special skill or knowledge is held to a higher standard of care.

Question 9

Family owns a local hardware store, and Nephew is one of the employees. Recently, Home Supplies, a national hardware chain, opened a location about five minutes away from Family Store. Family immediately noticed a decrease in customers and profit. Desiring to learn more about National Store’s operations and vendor contracts, Family agreed that Nephew will apply for a job at National Store, investigate the operations and contacts, and report back to Family Store so that FS can try to better compete. Nephew applied for a job with NS but made no mention of his affiliation with FS. Nephew was hired, and after working for NS for several weeks, learned that NS was selling shoddy products at inflated prices with the expectation that they would break quickly and need to be replaced. Nephew shared this information with FS and the local news. An investigative journalist investigated NS and discovered, in addition to NS’s knowingly selling shoddy products, other predatory sale tactics. NS wants to sue Nephew for damages. Does NS have a claim against Nephew?
A. No. This information was discovered by an investigative journalist, and so NS had no expectation of privacy.
B. No. This is simply part of market competition, and NS got its due.
C. Yes, because an agent has a duty to not disparage their principal.
D. Yes, because Nephew was working to advance an interest adverse to National Store.

Answer 9

D. Yes, because Nephew was working to advance an interest adverse to National Store.

Question 10

Franklin has worked as a manager for Bakery for the past seven years. Franklin is responsible for the day-to-day operations of the Bakery, including being the only contact with vendors. Recently, the daughter of the owner of Bakery graduated from culinary school, and the owner wants to bring the business back into the family. Accordingly, the owner informed Franklin that she was being let go and would no longer serve as manager. Upset about losing her job, Franklin called several of Bakery’s vendors and ordered unusually large (but not unheard of) quantities of products. Franklin knew that this would be an unexpected cost for Bakery, that Bakery did not have adequate storage for all products, and that many of the products would go bad before they could be used. When the enormous shipments arrived, the owner refused to accept or pay for the products. Will the owner have to pay for the products?
A. No, because Franklin had been terminated, and thus, had no authority to make the order.
B. No, because the vendors should have been suspicious about the size of the orders, and they should have contacted the owner to confirm.
C. Yes, because the vendors reasonably believed that Franklin had the authority to order the products on the owner’s behalf.
D. Yes, because it would be unfair to the vendors for the owner to not pay.

Answer 10

C. Yes, because the vendors reasonably believed that Franklin had the authority to order the products on the owner’s behalf.

Question 11

ABC together operate a successful business equipping and guiding tourist fishers. They registered the name “Pike Patrol” and opened a business bank account at a local bank. They operated profitably for several years. Then, one spring, they realized they had booked more clients than they could serve properly that summer. They emailed local fishers Dooley and Estrada (DE) and made the following offer: “Pike Patrol has more clients than it can service this summer. If you supply your own necessary equipment, then we will assign to you any client overage, that is, when we have over six clients per day, we will assign excess clients to you.” DE then each purchased fishing equipment costing about $4,000 each. During that summer, Pike Patrol had six to eight clients every day. Pike Patrol paid DE for the fishing trips they conducted. At the end of the summer, ABC decided to retire. When Pike Patrol ceased doing business, it had $100,000 in it business bank account. DE contend that the arrangement constituted a partnership and that DE are entitled to two-fifths of the bank balance. You are the lawyer for ABC. What is the best argument that ABY did not form a partnership with DE?
A. ABC never intended to form a partnership.
B. DE received different dollar amounts than did ABC.
C. The equipment DE purchased remained their separate property.
D. DE received wages; provided their own equipment as would an independent contractor; never made a contribution to partnership property; and never voted or otherwise participated in upper-level decision making.

Answer 11

D. DE received wages; provided their own equipment as would an independent contractor; never made a contribution to partnership property; and never voted or otherwise participated in upper-level decision making.

Question 12

Liam and Clare each own an Irish pub in the same city. To cash in on the microbrew craze, Liam and Clare wish to go together to establish a small microbrewery that will supply two or three locally brewed beers to each pub. The brewery will be located off-site, in the industrial part of town. The premises will be leased. Liam and Clare jointly sign the lease, hire the brewmeister, and purchase supplies and equipment. They do not memorialize their business arrangement. What is the best way to describe the legal status of their business arrangement?
A. A partnership
B. A joint venture
C. A limited liability company
D. Both a partnership and joint venture

Answer 12

D. Both a partnership and joint venture

Question 13

Developer entered into a 20-year lease with Landlord to develop and operate a commercial strip mall. Lacking the resources to fully fund the project, Develop partnered with Investor. They agreed that Investor would provide capital necessary to finance the project, and, in return, would receive 60% of the partnership’s profits. Likewise, Developer would manage the day-to-day operations and receive 40% of the partnership’s profits. Developer and Investor agreed to split the debts equally. The arrangement worked well for several years and was profitable, but then the partnership experienced a few rough financial years and the relationship between Developer and Investor soured. As the lease neared the end of its term, Developer and Investor were barely on speaking terms. Unaware of the relationship between the two, Landlord approached Developer to inquire if they would be interested in entering into a new lease of the space for an additional 20-year term after the current lease expired. Developer never told Investor about the new lease opportunity. Having built up enough capital so that Investor was no longer needed, however, Developer accepted Landlord’s offer and signed a new lease. After the new lease period began, Investor discovered the arrangement and was furious. Has Developer breached any fiduciary duty owed to Investor?
A. Yes. Developer owed Investor the punctilio of an honor the most sensitive, which Developer breached by entering into a new lease without Investor.
B. Yes. Developer owed Investor a duty of loyalty, which Developer breached by entering into a new lease without Investor.
C. No. Developer only owed a fiduciary duty to the partnership, not to Investor individually.
D. No. Developer owed a fiduciary duty to both the partnership and to Investor, but Developer’s actions did not violate the duty, and there is no indication that Developer failed to exercise any obligations to the partnership or to Investor in good faith.

Answer 13

D. No. Developer owed a fiduciary duty to both the partnership and to Investor, but Developer’s actions did not violate the duty, and there is no indication that Developer failed to exercise any obligations to the partnership or to Investor in good faith.

Question 14

The Moss family owns your client, British Auto Imports. Sterling Moss, the fleet sales manager, reached out to you, his attorney and counselor, about an order from the managing partner of Wycoff and Van Duzer, LLP, a law firm with 30 partners. The managing partner has placed an order for 40 luxury vehicles. The purchase is to be financed through British Auto Import’s in-house finance department. Moss wants to know what, if any, partnership paperwork he needs before he accepts and places the order with the factories for the new cars. What is the safest practical advice an attorney should give Moss?
A. The managing partner, or any partner, has the inherent authority to do such a deal. Go ahead and place an order.
B. Ask around and determine if the managing partner has done transactions like this in the past. If he has, there exists implied actual authority. Go ahead and place the order.
C. The managing partner, by being given the title, an office, letterhead stationery, and so on, has the apparent authority to do the deal. Go ahead and place the order.
D. Do not place the order. Require that the law firm produce a certified copy of a valid resolution adopted by its partners as a partnership meeting.

Answer 14

D. Do not place the order. Require that the law firm produce a certified copy of a valid resolution adopted by its partners as a partnership meeting.

Question 15

Turner and Kelley are law partners. Turner’s practice is primarily divorce while Kelley does general civil litigation. Without Kelley’s knowledge, Turner has been promising divorce clients high rates of return if they leave the proceeds of divorce settlements with Turner. Your client, Norma, left $400,000 with Turner, who paid her high interest for five years. Turner has now filed personal bankruptcy and is judgment proof. He stopped paying interest last year. The entire affair turns out to have been a Ponzi scheme. You represent Norma in a suit against Kelley and the law firm, and you seek to show that the partnership is liable. The defense proposes to put on the stand the state bar association president and partners from two other local law firms who all will testify that investigating client funds is not “carrying on in the usual way of business” of a law partnership, such that the partnership did not authorize the action and is not liable. Is there a good argument for excluding the testimony?
A. Yes. The proper test is the reasonable expectations of third parties and the public regarding what law firms do.
B. No. Norma was contributorily negligent in leaving the settlement proceeds with Turner.
C. No. The testimony is relevant as expert testimony about the scope of the ordinary practice of law.
D. It is a toss-up. The judge could rule either way without abusing her discretion.

Answer 15

A. Yes. The proper test is the reasonable expectations of third parties and the public regarding what law firms do.

Question 16

Joseph and Larry have practiced law together since law school graduation two years ago. Joseph discovers that Larry is an obsessive online shopper: Larry orders computers, printers, servers, and other computer accessories on a weekly basis. The law office is filled with Amazon boxes. Larry’s excesses vastly inflate the firm’s payable. Joseph has asked Larry to stop, to no avail. Joseph has also sent a registered letter to Amazon to cease shipments, but Amazon keeps shipping products anyway. What is the most appropriate next step for Joseph to take if he does not want to be liable for these Amazon purchases?
A. Notify Amazon that, as partner, Larry has no authority to bind the partnership in these matters.
B. Invoke a partner’s veto powers under the emergency doctrine and declare that Larry no longer has power to bind the partnership, notifying creditors.
C. Associate a new partner and then vote 2-1 to restrict Larry’s authority.
D. Dissolve the partnership by Joseph’s express will.

Answer 16

D. Dissolve the partnership by Joseph’s express will.

Question 17

Ken is a foreman for a local general contractor that does office renovations. Ken would like to strike out on his own but needs a certain amount of capital to purchase tools and a truck, and for working capital. He approaches Banksie, an old friend of his. Banksie agrees to contribute $100,000 to the enterprise. Ken will solicit clients, bid the renovation jobs, and do the work. Ken and Banksie agree that they will split the profits 50/50, but they do not discuss allocations of losses. They shake hands on the deal. One year later, a national pandemic causes many offices to close, and far fewer offices want remodeling. Ken “burns through” the $100,000 investment. He and Banksie agree that the venture is to end. Ken will go back to working for the large contractor. Banksie asks Ken to pay her $50,000 so that they will “come out even.” Ken refuses. If Banksie sues Ken for $50,000, what is the most likely result?
A. Ken must pay the $50,000 to Banksie because, unless otherwise agreed, partners share the losses in the same proportions as they share the profits.
B. Ken owes nothing to Banskie. While Banksie contributed capital, Ken contributed his labor. As a matter of fairness, Ken should not have to make an additional contribution to cover the partnership’s losses.
C. Banksie owes Ken $50,000 because the value of Ken’s labor, at his usual rate, to the partnership has a reasonable value far in excess of Banksie’s $50,000, to wit, $100,000.
D. Banskie owes Ken $50,000 because Ken’s labor cannot be valued higher than Banksie’s contribution.

Answer 17

B. Ken owes nothing to Banskie. While Banksie contributed capital, Ken contributed his labor. As a matter of fairness, Ken should not have to make an additional contribution to cover the partnership’s losses.

Question 18

Oden, Theo, and Luke collectively own and operate Norse Demolition and Earthmoving. Their business owns a great quantity of heavy equipment (e.g., bulldozers). After years of successfully leading the business, Oden now wishes to cash out his share of the partnership and retire. Oden has informed Theo and Luke about his decision and given notice that his retirement would take effect immediately, but also that he has no problem with the business’s continuing if they want it to. Oden just wants cash. Theo and Luke desire to continue the business. The partnership agreement says nothing about retirement or the effect of dissociation of a partner on the partnership. What is the current legal status of this partnership and the liabilities of the parties to each other?
A. Oden has dissociated as a partner, and as a result, the partnership is dissolved. The partners must now wind up affairs. After winding up, each partner shall get a third of residual profits, if any.
B. Oden has dissociated himself as a partner, and as a result, the partnership is dissolved; however, all three of the partners may waive the dissolution of the partnership and cause Oden’s shares to be bought out.
C. Oden’s dissociation is wrongful because it is unilateral, so he is not entitled to anything. Moreover, Theo and Luke can sue Oden for any damages to the partnership caused by his dissociation.
D. The partners must comply with the default rules of RUPA and have no authority to vary the default rules now.

Answer 18

B. Oden has dissociated himself as a partner, and as a result, the partnership is dissolved; however, all three of the partners may waive the dissolution of the partnership and cause Oden’s shares to be bought out.

Question 19

Pat and Mike have a partnership that owns two Irish taverns, one on the North side, where Pat lives, and one on the South Side, where Mike lives. The taverns are pretty much identical in decor, revenues, expenses, and so on. There are a few other assets (a pickup truck, extra chairs and tables, etc.). Pat and Mike have decided, quite amicably, to go their separate ways. Mike no longer wants to be in the tavern business. On the other hand, Pat wants to continue running the business. Additionally, Pat does not have the cash on hand to buy Mike out. Mike is sympathetic to the situation and Pat’s desire to continue, but he needs cash for retirement. Thus, he cannot agree to any outcome that does not put cash in his pocket. They have asked you as mediator to apply the partnership rules effectuating a split-up between them. How should you resolve this situation?
A. Pat gets the Northside Tavern and Mike gets the Southside Tavern. The other assets will be split equitably between them.
B. Both taverns and the miscellaneous assets are to be sold with the cash proceeds split 50/50.
C. Each partner gets an election to take a tavern or cash.
D. Pat gets the Northside Tavern and Mike gets the Southside Tavern, but the other assets will be sold at auction and the proceeds will be divided equally between them.

Answer 19

B. Both taverns and the miscellaneous assets are to be sold with the cash proceeds split 50/50.

Question 20

Keith and Belinda are partners who have run a talent agency together for five years. They have paid off all the debts they incurred when they formed the business, except for a $50,000 note payable to Belinda. Belinda has developed an impressive client list, but Keith has only a few clients, mostly B-class character actors. Keith manages the office and their information technology systems. He also performs numerous tasks for Belinda’s clients. Keith and Belinda have started bickering. Keith frequently complains about Belinda’s extravagant lunches and her multiple country club memberships. Sick of the complaints, Belinda moved her personal items out and set up shop in a new office she rented in another part of town. She began to make money hand over fist, but Keith floundered. Does Keith have a claim against Belinda?
A. No, not without a partnership agreement. The withdrawal of a partner dissolves the partnership. Such a dissolution is wrongful only if it contravenes some provision of the partnership agreement.
B. Yes. The partnership had an implied term, which was to pay off the debt incurred in its formation. Belinda’s dissolution of the partnership prior to that time is wrongful.
C. Yes. A partner at will is not bound to remain in the partnership, but Belinda must exercise her right to withdraw in good faith and consistent with fiduciary duties partners owe one another.
D. No, Belinda did not take anything that belonged to Keith.

Answer 20

A. No, not without a partnership agreement. The withdrawal of a partner dissolves the partnership. Such a dissolution is wrongful only if it contravenes some provision of the partnership agreement.

Question 21

Pat publicly supported a contentious candidate for US president - frequently, in high profile ways. Many of the partners in Pat’s law firm were infuriated by her support of what they deemed to be a loathsome candidate, and they became concerned that Pat’s public support would negatively impact the business. In a regularly scheduled partners’ meeting, a majority of the partners voted to expel Pat from the partnership. Pat is bewildered and upset. Can Pat win a suit for wrongful expulsion?
A. No. But her expulsion is an event of dissociation that does not cause the partnership to be dissolved, so she is entitled to her share of partnership assets in its winding up.
B. No. But her expulsion is an event of dissociation that causes the partnership to be dissolved, its business wound up, and terminated.
C. No. Partnerships are consensual arrangements, and an expulsion of a partner is permitted so long as the partners acted consistently with the obligation of good faith and fair dealing.
D. Yes. Any such clause would be void as against public policy if exercised in such a way as to deny a partner her fundamental First Amendment rights.

Answer 21

A. No. But her expulsion is an event of dissociation that does not cause the partnership to be dissolved, so she is entitled to her share of partnership assets in its winding up.

Question 22

Paul and Olivia operate a beach equipment rental business as a general partnership. Each partner contributed $5,000 to purchase equipment and supplies, and they agreed to share the profits and losses evenly. They spend their days renting umbrellas, chairs, and canopies to beachgoers. After a month in business, Paul and Olivia have made $5,000 in profit. What interest do each of the partners have in the $5,000 profits?
A. Each partner is entitled to immediately receive a check from the partnership for $2,500, but this payment will have no effect on the partners’ financial interest in the partnership.
B. Each partner is entitled to immediately receive a check from the partnership for $2,500, but this payment will reduce the partners’ capital accounts by $2,500.
C. The profits belong to the partnership, not the partners individually.
D. Each partner has a capital amount which should be updated to reflect their shares of the profits, but the partners are not entitled to any immediate payment.

Answer 22

D. Each partner has a capital amount which should be updated to reflect their shares of the profits, but the partners are not entitled to any immediate payment.

Question 23

Paul and Olivia operate a beach equipment rental business as a general partnership. The partnership has been doing well, and the partners have decided to build a beach shack to house their equipment. The partners have the liquid funds to pay for much of the construction, but they did not anticipate the steep licensing costs to build on the beach. Accordingly, the partnership took out a loan for $30,000. Thereafter, a number of particularly strong hurricanes came through, and then a migration of jellyfish deterred the usual crowds from coming to the beach. After several months of impacted business, the partners were out of money and realized they could no longer operate the business. They had to shut down, but even after they liquidated all the partnership property, they still owed $20,000 on the loan. What are the partners’ obligations as to the repayment of the loan?
A. None. This is the partnership’s obligation, not the obligation of the partners.
B. Each partner is only liable to pay half the debt, $10,000.
C. As between the partners, each partner is liable to pay half the debt, but each partner is jointly and severally liable to the lender for the full amount of the debt.
D. Each partner is jointly and severally liable for the full debt.

Answer 23

C. As between the partners, each partner is liable to pay half the debt, but each partner is jointly and severally liable to the lender for the full amount of the debt.

Question 24

Paul and Olivia operate a beach equipment rental business as a general partnership, and they have agreed to share the profits and losses evenly. At the end of the year, the partnership had earned an impressive $10,000 in profit. How should the $10,000 profit be handled for the purposes of federal income tax liability?
A. The partnership is responsible for the federal income tax liability.
B. Each partner is individually responsible for half of the federal income tax liability, and each partner’s capital account should be credited with half of the profit.
C. No partner is responsible for any of the federal income tax liability unless they have received a distribution, and then, the partner bears the federal income tax liability for the distribution they have received.
D. Each partner is individually responsible for half of the federal income tax liability, but this does not impact the partner’s financial interest in the partnership.

Answer 24

B. Each partner is individually responsible for half of the federal income tax liability, and each partner’s capital account should be credited with half of the profit.

Question 25

Foster and McGee operate a landscaping business as a general partnership. One day, while in the ordinary course of the partnership’s business, Foster negligently caused injury to a bystander at a landscaping job. The bystander incurred a serious injury and desires to sue for damages. Against whom may the bystander file suit?
A. Foster only
B. The partnership only
C. The partnership and Foster, but not McGee
D. The partnership, Foster, and McGee

Answer 25

D. The partnership, Foster, and McGee

Question 26

Roy Bean and his sister Gail, both well to do denstits, own a store they operate as Bean’s Exotic Food Supplies. Gail has also become the host of a popular cooking show on local television. Bean’s food store, after three years of losses, has become profitable, at least in the busy months of the year. In the coming year, they plan to lease premises and open three new stores in the southeastern part of the country. The leases will have seven to eight year terms. The business plan, which they prepared for the bank, shows the new stores breaking even in the fourth year. As they embark upon this expansion, they consult you, their attorney, for advice. Which of the following provides the best advice for Roy and Gail?
A. Do nothing. They can save money on legal fees and filing costs by continuing to operate as a general partnership.
B. Form a corporation and elect subchapter S status under the IRC.
C. Hire counsel in Wilmington and form a Delaware corporation.
D. Hire you to draft a detailed partnership agreement.

Answer 26

B. Form a corporation and elect subchapter S status under the IRC.

Question 27

Six lawyers practice as partners in a boutique litigation firm. Last year, a client brought a malpractice claim against one partner, and the settlement amount exceeded the group’s malpractice policy limits. Each partner had to chip in $40,000. They do not wish to see that happen again. What alternatives do they have?
A. Remain a general partnership because the Rules of Professional Conduct require it.
B. Form a corporation and elect subchapter S status under the IRC.
C. Form a professional service corporation.
D. Form a limited partnership with one lawyer as the general partner and the rest as limited partners.

Answer 27

C. Form a professional service corporation.

Question 28

Buddy wishes to incorporate his luxury used car business and, as his lawyer, you concur. Buddy, his business, and you are all located in the State of Peace (a fictional US jurisdiction that has adopted the MBCA). Buddy should form his corporation by filing articles of incorporation with the Secretary of State in…
A. Peace
B. Nevada
C. Delaware
D. An offshore location.

Answer 28

A. Peace

Question 29

Musicians Flaunce and Posh have formed a corporation to produce their music. Posh is concerned that Flaunce, if given the chance, will use corporate resources to open a nightclub as a venue for her performances. In their preliminary meeting with their attorney, Posh voices her concerns, and Flaunce agrees to any reasonable measures that would rein in or check her expansionary desires. What is the simplest way for the attorney to implement Flaunce’s and Posh’s meeting of the minds?
A. Draft a hold harmless agreement making Flaunce responsible for any losses occasioned by unauthorized expansion of the corporation’s business.
B. Do the same in an employment agreement that outlines Flaunce’s responsibilities.
C. Draft a narrow purpose article in the articles of incorporation.
D. Have Flaunce post a bond, with a commercial surety thereon.

Answer 29

C. Draft a narrow purpose article in the articles of incorporation.

Question 30

Ernst Thompson came upon commercial property for rent and decided that the location would be an ideal spot for a new McDonalds restaurant. Ernst negotiated fact to face with the landlord while wearing a McDonalds polo shirt. When the landlord offered Ernst a lease, he accepted by signing “ET McDonalds Inc.” Ernst then applied to McDonalds for a franchise. When McDonalds denied Ernst’s application, Ernst decided not to file incorporation documents and so never formed ET McDonalds Inc. Ernst then called the landlord and repudiated the commercial lease. Is Ernst liable for the lease?
A. No, because a non-existent corporation may act.
B. No, because Ernst is protected by corporate limited liability.
C. Yes, because Ernst committed fraud.
D. Yes, because Ernst is subject to promoter liability.

Answer 30

D. Yes, because Ernst is subject to promoter liability.

Question 31

A promoter inadvertently enters into a contract with a seller on behalf of a to-be-formed corporation. How can the promoter avoid liability for that contract?
A. No action required. The promoter is protected by corporate limited liability.
B. Hold a board of directors meeting where the corporation agrees to indemnify and hold harmless the promoter.
C. Agree between the promoter, the seller, and the corporation to a novation after the corporation comes into existence.
D. Agree with the seller that the promoter is protected by limited liability.

Answer 31

C. Agree between the promoter, the seller, and the corporation to a novation after the corporation comes into existence.

Question 32

A commercial airline pilot quits his job working for a large airline to start his own charter air service. The pilot hires a lawyer to incorporate a corporation on his behalf. The lawyer tells the pilot that the corporation is created and sends the pilot a bill for related legal services, which the pilot pays. Acting for the corporation, the pilot then contacts Learjet and orders a Learjet 70 for $3 million on credit, with the initial payment due in 30 days. Four weeks later, the lawyer calls the pilot and says that the corporation was not actually formed because a business with the same name already exists in that state. The pilot failed to make the first payment to Learjet, and Learjet sues the pilot personally. What is the pilot’s best defense?
A. The corporation has de jure corporate status.
B. The pilot is shielded by de facto corporate existence.
C. The pilot is shielded by promoter liability.
D. The pilot lacked knowledge that the corporation had not been formed.

Answer 32

D. The pilot lacked knowledge that the corporation had not been formed.

Question 33

Melba, as a sole shareholder, formed CE, Inc., for the purpose of acquiring the assets of a neighborhood pub. Melba capitalized CE for $10,000, in return for common stock. She then used CE to enter into an asset purchase agreement to purchase the pub for $50,000 payable as follows: $7,500 cash down payment and a promissory note for $42,500 to the sellers. Later, CE borrowed $42,500 from Bank to pay off the purchase of the pub, but Bank required Melba to personally guarantee the loan. CE, Inc., purchased a $100,000 liability insurance policy. Months into the venture, when Melba was working at the pub, a customer left in an inebriated condition and got into a wreck that resulted in serious injury to a pedestrian. The jurisdiction allows anyone injured by an inebriated driver to also bring suit against the owner of the pub and anyone who actually served the driver alcohol. The pedestrian brought suit against the driver, CE, and Melba individually. Is there a basis for the court to hold Melba personally liable for the pedestrian’s injuries?
A. Yes. The court should disregard the corporate liability shield because CE only has one shareholder and that shareholder is heavily involved in the day-to-day activities of the corporation.
B. Yes. The court should disregard the corporate liability shield because CE only acquired minimal liability insurance and is under-capitalized considering the potential risk.
C. No, Melba should not be held liable because CE’s capital is adequate and there is no indication that Melba was using CE as an alter ego.
D. No. Melba cannot be personally liable for any obligation arising from CE’s activities.

Answer 33

C. No, Melba should not be held liable because CE’s capital is adequate and there is no indication that Melba was using CE as an alter ego.

Question 34

Melba, as a sole shareholder, formed CE, Inc., for the purpose of acquiring the assets of a neighborhood pub. Melba capitalized CE for $10,000, in return for common stock. She then used CE to enter into an asset purchase agreement to purchase the pub for $50,000 payable as follows: $7,500 cash down payment and a promissory note for $42,500 to the sellers. Later, CE borrowed $42,500 from Bank to pay off the purchase of the pub, but Bank required Melba to personally guarantee the loan. CE, Inc., purchased a $100,000 liability insurance policy. Months into the venture, when Melba was working at the pub, a customer left in an inebriated condition and got into a wreck that resulted in serious injury to a pedestrian. The jurisdiction allows anyone injured by an inebriated driver to also bring suit against the owner of the pub and anyone who actually served the driver alcohol. The pedestrian brought suit against the driver, CE, and Melba individually. Is there a basis for the court to hold Melba personally liable for the pedestrian’s injuries?
A. Yes. The court should disregard the corporate liability shield because CE only has one shareholder and that shareholder is heavily involved in the day-to-day activities of the corporation.
B. Yes. The court should disregard the corporate liability shield because CE only acquired minimal liability insurance and is under-capitalized considering the potential risk.
C. No, Melba should not be held liable because CE’s capital is adequate and there is no indication that Melba was using CE as an alter ego.
D. No. Melba cannot be personally liable for any obligation arising from CE’s activities.

Answer 34

C. No, Melba should not be held liable because CE’s capital is adequate and there is no indication that Melba was using CE as an alter ego.

Question 35

Kenyon owns a warehouse and a manufacturing facility, which he has leased for 20 years to AgriPac, Inc. AgriPac enters bankruptcy. Back East Inc (BEI), a billion dollar company, has an interest in expanding to Kenyon’s area. It forms a subsidiary corporation, AgriEast, to acquire the assets and assume some of the contracts of AgriPac out of bankruptcy. BEI puts in its own officers as directors and officers of subsidiary AgriEast. Within a year, all of the managers of AgriEast have been dismissed, their functions assumed by BEI under a “services agreement” under which AgriEast pays its parent corporation $1 million plus 40% of earnings before taxes, interest, depreciation, and amortization. Soon AgriEast’s top customers are being billed by BEI. Correspondence with AgriEast’s top customers and bankers often is on BEI stationery, and signed by BEI managers. After two years, BEI fires everyone at AgriEast and closes shop. All the top AgriEast customers are now BEI customers. BEI capitalized AgriEast with only $1,000 of its own money, causing AgriEast to borrow $70 million to operate. Kenyon now has an empty warehouse and manufacturing facility, with 15 years left of the lease. He has been unable to rent the facility. He calculates that he is losing over $1.5 million per year. Kenyon has filed a complaint alleging breach of contract against insolvent AgriEast. Kenyon should amend his complaint to?
A. Allege personal liability of BEI’s officers and directors.
B. Pierce the corporate veil to reach the assets of BEI.
C. Add allegations of a conspiracy to defraud, naming BEI’s officers, BEI, and AgriEast as co-conspirators.
D. Seek the intervention of the state attorney general because BEI abused the corporate form when it formed AgriEast as a corporation and capitalized it for only $1,000.

Answer 35

B. Pierce the corporate veil to reach the assets of BEI.

Question 36

BigGasCo operates a fleet of oil tankers. Captain of one of the supertankers became intoxicated while on duty and left First Mate in charge of the ship while in shallow water. First Mate, who had less training than Captain, drove the giant ship around, ripping open its hull and spilling millions of gallons of crude oil. The damages to the environment and to the local fishing community totaled $15-20 billion. Evidence at trial established that Captain and First Mate were both negligent and that BigGasCo was aware of Captain’s propensity to “drink and boat” and to leave the untrained First Mate in charge. Discovery reveals, though, that this supertanker, and every other tanker in the BigGasCo fleet, is owned and staffed by an individual corporation, and this supertanker was owned by Transportation Co. Transportation Co. also hired and supervised Captain and First Mate. BigGasCo, however, owns each of the brother-sister (sibling) corporations, including Transportation Co. What is the best argument for holding BigGasCo liable for the damage?
A. BigGasCo should be liable because it commissioned the shipment.
B. Even though BigGasCo and Transportation Co are technically separate entities, they operate as one single enterprise.
C. Transportation Co. is an agent of BigGasCo, and therefore Transportation Co’s negligence should be attributed to BigGasCo.
D. BigGasCo should be liable because a third party would be unaware that the supertanker was owned by Transportation Co.

Answer 36

B. Even though BigGasCo and Transportation Co are technically separate entities, they operate as one single enterprise.

Question 37

The directors of New Idea, a publicly-held corporation incorporated under Delaware law, have recently been exploring expanding into new lines of business. After conducting standard due diligence, the directors have just approved a contract with a food manufacturer for the exclusive rights to manufacture frozen meat in the mid-Atlantic region of the country. To carry out this endeavor, the directors also approved the acquisition of a distribution center. Unfortunately, six months after approving the contract, public health officials announced that a new disease strain had been discovered in recent weeks in several of the products manufactured by the food manufacturer. As a result, stores in the mid-Atlantic region refused to purchase or sell the food product. New Idea was able to resell the distribution center, but at a significantly lower price than for what it was acquired. New Idea suffered a $3 million loss as a result of the contract and sale of the distribution center. Have the directors of New Idea breached their duty of care?
A. Yes, because the corporation lost $3 million as a result of the directors’ poor decision.
B. Yes, because the directors should never have entered into this contract or acquired the distribution center.
C. No, because the directors made a reasonable business decision based on standard due diligence.
D. No, because directors never owe liability for business loss.

Answer 37

C. No, because the directors made a reasonable business decision based on standard due diligence.

Question 38

The board of Missed Opportunity, a public corporation incorporated under Delaware law, had noted that the corporation had on hand excess cash of $500 million. Desiring to lie low for a year, after a quick canvas of the markets, the board directed the CFO to invest the cash in tax-free municipal bonds earning five percent interest. Uncertainty in the markets soon thereafter pushed interest rates to 16 percent in the short-term bond market. With all of that excess cash, Missed Opportunity could have earned considerably more in the high-yield bond market. A shareholder has sued the board, seeking to hold liable its members for the decision they made. The board files a motion for summary judgment. The judge asks you, his law clerk, what decision he should make on the motion and why. You recommend that the judge do which of the following?
A. Grant the motion. The law charges board of directors, not judges, with management of the corporation’s business.
B. Grant the motion. Courts will not second guess business decisions made in good faith by duly elected corporate officials.
C. Grant the motion. The board decision is protected by the business judgment rule.
D. Deny the motion. The board of directors failed to comply with the business judgment rule.

Answer 38

C. Grant the motion. The board decision is protected by the business judgment rule.

Question 39

Old Line Insurance is a public corporation incorporated under Delaware law that operates as a regional medical malpractice insurance carrier. The directors of Old Line never discussed or otherwise inquired into the adequacy of Old Line’s cash reserves, nor was there any reporting system in place to draw the board’s attention to the cash reserve status. When malpractice claims increased, and the payout per claim also increased, Old Line had insufficient reserves to carry it through the tough times. When Old Line began to fail, the state insurance commissioner put the corporation in receivership. The shareholders lost the entire value of their investment.
Which of the following best describes the board’s breach of fiduciary duty?
A. Simple negligence in breach of the duty of care.
B. Intentional or knowing violation of law in breach of the duty of care.
C. Sustained and systematic failure to exercise oversight in breach of the duty of loyalty.
D. A conflict-of-interest transaction in breach of the duty of loyalty.

Answer 39

C. Sustained and systematic failure to exercise oversight in breach of the duty of loyalty.

Question 40

The directors of Old LIne include an actuary who practices her profession through her own actuarial firm and a corporate lawyer form a large multi-service metropolitan law firm. The board also includes the son and daughter of the controlling shareholder, who is the CEO. The daughter is a senior in college. Neither the son nor the daughter attended board or committee meetings regularly, nor did they do anything to familiarize themselves with the insurance industry, with Old Line, or with the current issues it faced. If you had assess the prospects of liability for a board decision, which of the following would be your best estimate?
A. The actuary and the attorney may well be liable, but the son and daughter would not.
B. The son and daughter would be liable, but the lawyer and actuary would not.
C. None would face liability.
D. All four would face liability.

Answer 40

D. All four would face liability.

Question 41

Two other Old Line directors defend on other grounds. Tipton was a former CEO of Big Time Insurance. He now lives most of the year at his farmhouse in Vermont. What meetings he participates in, he participates by conference call. In his deposition, he testifies that he allowed his name to be added to the Old LIne board to enhance Old Line’s prestige. Pont, a retired university administrator and coach in Bloomington, Indiana, attends meetings, but only when they concern the company’s business in Indiana. He testifies that he was added to the board to help it drum up and service business in the Hoosier State. Are these valid defenses?
A. No. Each and every director must bring their abilities to bear on the full range of issues the board confronts or should confront.
B. Yes. In its judgment the board may add members to the board of directors based upon their prestige value.
C. Yes. Companies that do business over a broad geographical area need to allocate directors’ seats geographically.
D. No. Directors who fail to attend all, or most, of the board’s meetings will be liable for violation of their duty of care.

Answer 41

A. No. Each and every director must bring their abilities to bear on the full range of issues the board confronts or should confront.

Question 42

Cambridge Bank is an old-fashioned bank. It has one office, three tellers, a cashier, a president who is responsible for day-to-day bank operations, and a seven person board of directors, which meet quarterly, but after the bank has closed for the day. Cambridge Bank also has no computers. All recordkeeping is done by hand. The cashier takes slips from the tellers, makes entries in the journal and ledgers by hand, and counts the cash at the end of each day. The cashier is a young fellow who, after working for two years, has arrived at work in a brand-new convertible. He has also recently taken to wearing expensive suits. Likewise, though in the last three years the bank seemed very busy, deposits have continued to drop. Finally the outside auditors call in all of the depositiors’ passbooks. The passbooks show deposits exceeding those recorded in the ledger by over $250,000 annually. Deposits actually have increased, but the cash is gone. Upon interrogation, the cashier breaks down and confesses. Alas, he has spent all the money and the bank is now defunct. Disgruntled shareholders sue the cashier, the president, and the directors. Who has breached their fiduciary duty to the corporation and the shareholders?
A. The cashier
B. The directors
C. The president
D. The directors and the president.

Answer 42

D. The directors and the president.

Question 43

Aged director Veeck has been on the board of Ruckers for 15 years. The Ruckers board meets monthly. Veeck has been troubled by a persistent lung infection. In September, he decides that he would rather not face the cold winter. He leases a home on Siesta Key, below Sarasota, FL. After the October board meeting, Veeck journeys down to Sarasota. He misses the November meeting. He participates by conference call in December. In addition, each month the Ruckers corporate secretary federal expresses a “board packet” (trial financial statements, minutes of previous meeting, reports, etc) to Veeck, which he takes great care to review. He also misses the January meeting. Still not well, Veeck decides to stay in FL until April or May. He seeks your advice about what he should do with regard to his Ruckers board commitment. What is your advice?
A. Directors have an affirmative duty to attend board meetings, and so he needs to attend despite his health issues.
B. Veeck is likely already consciously disregarding his duties, so he should resign now.
C. If Veeck misses another meeting, he should resign then.
D. A director’s duty is to keep informed, and so he should try as best he can to participate by conference call and continue to review carefully his board packets.

Answer 43

D. A director’s duty is to keep informed, and so he should try as best he can to participate by conference call and continue to review carefully his board packets.

Question 44

Gherkin is the CEO of a large, publicly-held company who is approaching retirement and holds four million shares of the company. The company, TransWheel, has a share price that has languished in the high $30s for several years, even though the book value of the company is $45 per share. A few months ago, Gherkin had the CFO “run the numbers” on a purchase of the company using its cash flow to service the debt that would be incurred if Gherkin and the other senior managers bought up all the shares currently held by the public. The CFO reported back that a buyout would be feasible at prices up to and slightly beyond $60 per share. There were no third-party buyers at $61-62 per share, so Gherkin went to see a well-known financier, Ghoul. Ghoul offered to buy the company at $55 per share but also insisted upon an option to purchase one million TransWheel shares from TransWheel at $38 per share and a “no shop” clause. Under the latter arrangement, the TransWheel senior management would not be able to test the market to see if a better price could be obtained. All of the foregoing occurred on a Friday and the following Monday. On Tuesday, Gherkin then called a special meeting of the TransWheel board of directors for Friday morning. You are personal counsel to two outside directors of TransWheel. The directors called you during a break in the meeting. Gherkin had asked for approval by the board of the buyout by Ghoul after an hour-long meeting. He has not even presented them with the documents for the proposed transaction. He has started pounding the conference room table. What should you tell them to do?
A. Go ahead and vote for the deal. Fifty-five dollars is a good price and the business judgment rule will protect you.
B. Fifty-five dollars may be a good price, but you won’t know that for certain until reviewing all the underlying documentation.
C. Gherkin and perhaps other insiders are pushing too hard. Refer the matter to a committee of independent directors.
D. The board should refer this to a committee of independent directors and empower the committee to hire an independent investment banker and independent law firm, meet other several sessions before calling the question, and leave an “out” for the directors should a clearly superior bid surface.

Answer 44

D. The board should refer this to a committee of independent directors and empower the committee to hire an independent investment banker and independent law firm, meet other several sessions before calling the question, and leave an “out” for the directors should a clearly superior bid surface.

Question 45

The board of Shady Pines, a small public corporation, decided that it would be in the best interest of the corporation to seek to be acquired by a larger corporation. The company, although historically profitable and holding valuable assets, had been operating in a depressed economy and was anticipating low future growth. The board charged two officers, President and CFO, to solicit bids to purchase the corporation. President and CFO complied and worked with a firm to list the corporation for sale. They received three offers. They quickly rejected the first offer because the acquiring corporation would not retain them as officers after the acquisition. After the board determined that the remaining two offers were acceptable, President and CFO began the due diligence process with the offerors; however, both failed to fully participate. They missed several deadlines and neglected to provide pertinent information. As a result, an offer was withdrawn and the other was revised to a substantially lower amount. At the annual meeting of the shareholders, the board reported as to the efforts to sell and specifically stated, “We currently have one offer that is far below asking price.” Accordingly, the board proposed taking the corporation private instead of selling it. The shareholders voted to approve the privatization; however, one director (also a two percent shareholder), who had voted against the proposal and knew about President and CFO’s failure to fully participate in the due diligence process, sued to invalidate the privatization measure because President and CFO breached their fiduciary duties to the corporation. President and CFO have defended by maintaining that their actions were undertaken in their capacities as officers rather than as directors, and thus, they did not owe a fiduciary duty to the corporation. Are President and CFO correct that they do not owe fiduciary duties to the corporation?
A. Yes. Officers do not owe fiduciary duties to the corporation.
B. Yes. Officers do not owe fiduciary duties to the corporation unless they specifically agreed to undertake such duty by contract.
C. No. Officers owe fiduciary duties to the corporation that are generally the same as those owed by directors.
D. No. Officers owe fiduciary duties to the corporation, but they are substantially less than those owed by the directors.

Answer 45

C. No. Officers owe fiduciary duties to the corporation that are generally the same as those owed by directors.

Question 46

You are an associate in a small “town square” law firm that provides a variety of services to clients. Your supervising attorney primarily practices in personal injury but has looped you in on a business planning matter for a friend of hers. The friend, along with six others, wants to form a corporation to do software development. They also have a handful of investors who want stock in the company. Your supervising attorney, however, recalls the case of Smith v. Van Gorkum, and she wants to be sure to avoid that outcome as best as possible. She has instructed you to draft the broadest indemnification provision permissible under current Delaware law. Which of the following provisions both accomplishes your supervising attorney’s instructions and is enforceable under current Delaware law?
A. The directors and officers are exculpated for all monetary damages arising out of any breach of fiduciary duty.
B. The directors are exculpated for all monetary damages arising out of any breach of fiduciary duty.
C. The directors and officers are exculpated for all monetary damages arising out of any breach of duty of care, but not for any intentional or knowing violation of law, breach of fiduciary duty of loyalty, or actions not in good faith.
D. The directors are exculpated for all monetary damages arising out of any breach of duty of care, but not for any intentional or knowing violation of law, breach of fiduciary duty of loyalty, or actions not in good faith.

Answer 46

C. The directors and officers are exculpated for all monetary damages arising out of any breach of duty of care, but not for any intentional or knowing violation of law, breach of fiduciary duty of loyalty, or actions not in good faith.

Question 47

Baron Inc owns a minor league baseball team that plays its home games at Stadium. Baron’s majority shareholder, Laker, a successful local car dealer, fervently believes that “God intended baseball games to be played outdoors in the afternoon.” Stadium thus has no lights; it cannot accommodate nighttime baseball. Recently, a celebrated athlete has decided to try his hand at baseball with Baron’s team. His presence would triple attendance, that is, if the games were played at night. Instead, Baron continues to lose money each year. Year after year, in attempts to avoid upsetting Laker, the Baron board summarily votes to continue to have the team play day baseball only. Foster is a minority shareholder who has given up on the minor league team. He has sued Laker and the other board members for breach of the duty of care. Foster says that if the directors only conducted the most perfunctory market study they would see that the team could make considerably more money playing nighttime baseball, especially given the presence of the aforesaid celebrated athlete.
Is Foster’s suit likely to succeed?
A. Yes, because the directors have not made an independent decision or judgment. They have merely rubber stamped the controlling shareholder’s decision.
B. No, because absent fraud, directors’ decisions are protected from judicial scrutiny by the business judgment rule.
C. No, because the directors have no personal financial stake in the outcome, and therefore, they and their decisions are protected by the business judgment rule.
D. Yes, because the directors failed to comply with the business judgment rule.

Answer 47

A. Yes, because the directors have not made an independent decision or judgment. They have merely rubber stamped the controlling shareholder’s decision.

Question 48

Presume that all directors of Baron Inc are pillars of the local business community. None has financial ties to the Barons or its controlling shareholders. They are CEOs and business leaders. Only one or two have social ties to Laker. When confronted by the shareholder demand to consider playing night baseball, the directors hire a consultant, who quickly renders onto the board a written report. The report purports to find a trend back to daytime baseball, at least by minor league teams operating in cities with more than 400,000 inhabitants. The consultant also openly discloses that he is the president of a not-for-profit organization “Daytime Baseball Boosters Inc.” Following receipt and review of the report, the directors now vote 6-0 to continue playing daytime baseball only. Would you as a plaintiff’s attorney still take the case of the complaining Barons’ shareholder?
A. Yes, because the directors have a duty of care. Receipt of one report by a biased consultant, quickly produced, does not measure up to the directors’ duty.
B. No, because how much information is enough information is itself a matter of business judgment.
C. Yes, because directors making such a decision have a duty not just of due care but of the utmost care.
D. No, because decisions of independent directors, as here, are unassailable.

Answer 48

B. No, because how much information is enough information is itself a matter of business judgment.

Question 49

Mercury Bell Co, a local communications company, has equipped a state political party with technological resources and support for a campaign drive. Though the political party’s candidates win, after the election season ends, the party has a huge $4 million bill which it cannot pay. The political party seeks forgiveness of the debt. Mercury’s board of directors deliberates. Forgiveness of the debt might well serve the company’s best interests as the party’s candidate won the election and the company has several important measures on its legislative agenda. None of the directors has an interest in the subject matter of the decision. The board receives reports from the CFO and the company’s attorneys. The CFO opines that forgiveness of the debt will not put the company in any financial strait. But the attorney offers a caveat that the forgiveness of the debt may be construed as an indirect gift to partisan campaigns for political office and, hence, illegal. She indicates that she will do further research on the question. The board however, is impatient. They decide to vote. They forgive the debt. A week later, the attorney reports back that the debt forgiveness does not run afoul of campaign finance laws. Is Mercury Bell board’s decision likely to be shielded from judicial scrutiny by the business judgment rule?
A. Yes. The directors made a decision or judgment, they reasonably informed themselves, and they rationally believed the decision made was in the best interests of the corporation.
B. Yes. The directors exercised not only some care, as the rule requires, but due care.
C. Yes. The decision ultimately turned out to be legally permissible.
D. No. The directors did not make the decision in good faith because they had notice that the forgiveness might be illegal.

Answer 49

D. No. The directors did not make the decision in good faith because they had notice that the forgiveness might be illegal.

Question 50

The board of VideoGame Inc, a publicly-held entertainment company, is concerned over a sudden spike in the trading volume of VideoGame stock. They have reason to believe that several activist hedge fund traders are working in concert to acquire the stock with an eye toward waging a proxy contest. The VideoGame board has convened a special meeting to consider adoption of a shareholder rights plan that would enable them to ward off any hostile takeover bid. They have asked you, as counsel, to address the board and then guide them through the process of adopting takeover defenses.
Which of the following should you advise them not to do?
A. Ensure that any defense measure “is reasonable in relation to the threat posed.”
B. Convene the independent directors in executive session for the final discussion and actual adoption of the defenses.
C. Stagger the board of directors into three classes and resurrect a requirement of removal for cause only.
D. Adopt a scorched earth policy of sorts that prevents any one shareholder from acquiring more than 2% of the outstanding stock without board consent.

Answer 50

D. Adopt a scorched earth policy of sorts that prevents any one shareholder from acquiring more than 2% of the outstanding stock without board consent.

Question 51

Presume that the hedge fund files a Schedule 13D with the SEC (a form that must be filed when a person or group acquires more than 5% of a voting class of stock, also known as a beneficial owner report). The hedge fund announces 15% ownership and an intention to make a cash offer for a majority of the VideoGame shares at 30% over the market price of $20, or $26 per share. VideoGame convinces a friendly competitor, Firstwave, to make a rival bid at $28 per share. The hedge fund rises to the occasion and bumps its offer to $30. Firstwave matches that bid. The hedge find then raises its offer to $33. The independent directors of VideoGame board meet, and afterward, the board recommends that shareholders accept the $30 Firstwave bid. The directors themselves will tender to Firstwave to acquire but unissued VideoGame shares equivalent to 25% of the VideoGame outstanding shares. One of the reasons the VideoGame board states for favoring Firstwave offer is that they had promised to keep all or most of the incumbent VideoGame managers in place. Investor Lynch’s mutual fund owns two million shares of VideoGame and is upset that success of the inferior bid will cause him to leave $6 million “on the table.” Does the business judgment rule forestall any meaningful challenge to the action by the VideoGame board?
A. Yes, because the directors carefully examined the competing offers and made a decision or judgment.
B. Yes, because the directors took action that was “reasonable in relation to the threat posed” by the hedge fund’s ownership.
C. No, because once it becomes certain that the target company will be sold or broken up, directors cease to be “defenders of the corporate bastion” and must attempt to maximize the short-term value for the shareholders.
D. No, because the directors had a conflict of interest and were more interested in taking care of the incumbent management at VideoGame than in serving shareholders’ best interests.

Answer 51

C. No, because once it becomes certain that the target company will be sold or broken up, directors cease to be “defenders of the corporate bastion” and must attempt to maximize the short-term value for the shareholders.

Question 52

Full Sail, Inc, a public corporation incorporated under Delaware law, is a successful microbrewery that has two product lines: Golden Ale and Amber Lager. The board proposes to sell off a brewery and product line (Golden Ale). Director Birch is interested but believes that if he bids on the proposed Golden Ale “spin-off,” he will be “held hostage.” Birch was the wealthiest of the directors. Birch, therefore, has his cousin, Porter, form a new corporation. That entity purchases Golden Ale, without ever disclosing its association with Birch. Five years later, Golden Ale has proven to be wildly successful. A Full Sail director, however, learns that Birch has been the one behind the new venture all along. Full Sail has demanded that Birch turn over his stock in the new business. Should Birch defend or should he attempt to settle?
A. Defend. The new corporation paid an objectively verifiable “fair” price for the Golden Ale line. Full Sail has not been damaged.
B. Defend. Most of the increase in value can be proven to be due to Birch’s management effort and expertise. Damages due to Full Sail will be small, if any.
C. Defend, but have Birch resign from the board and make his resignation retroactive.
D. Settle. Birch has breached his duty of loyalty, and he is liable not only for any damage to the corporation but also for an illicit gain.

Answer 52

D. Settle. Birch has breached his duty of loyalty, and he is liable not only for any damage to the corporation but also for an illicit gain.

Question 53

Earhart sits on the boards of both Aircraft, Ltd, and Overby Corning Composites, Inc. Aircraft has been purchasing composite wing assemblies from Overby for its new commuter airliner. The Aircraft purchasing department has been purchasing approximately $900,000 worth of wing assemblies per year. Aircraft’s annual sales are $100 million. Earhart has discovered these facts. Does Earhart need to do anything?
A. No. She has no conflict of interest because the transactions are not material as a percentage of Aircraft’s sales or profits.
B. No. She has no personal interest in the subject matter other than the “interlocking” directorate position.
C. Yes. She must disclose to the Aircraft board of directors her interest in the transaction and have the disinterested directors approve (or reject) the transaction with Overby.
D. Maybe. She must disclose and receive board approval if she participated in or influenced negotiation of the transaction.

Answer 53

C. Yes. She must disclose to the Aircraft board of directors her interest in the transaction and have the disinterested directors approve (or reject) the transaction with Overby.

Question 54

The Klein and Lauren families own a Delaware corporation which produces designer jeans. Dissatisfied with a lack of bank financing, the Klein family boycotts meetings, concentrating its resources on real estate ventures instead. Determined not to permit a listing ship to capsize, and having a quorum at meetings, the Lauren family approves the loan of personal funds to the corporation at a high rate of interest that reflects the speculative nature of the enterprise. They also cause the corporation to enter into and pay a substantial but justifiable management fee to themselves. Things soon settle, and the enterprise is profitable again. The Kleins, however, sue, alleging that the Laurens have “violated” the interested director statute. The Lauren family consults you. Is the Klein family’s claim a good one?
A. Yes. The law requires full disclosure and the vote of a disinterested decision maker; otherwise, the loan transaction is voidable.
B. No, but the burden will be on the Lauren family to demonstrate why they did not comply with the statute.
C. No. The directors alleged to have had a conflict may always prove the fairness of the transaction.
D. Yes. If the directors or shareholders loan funds to the corporation, they must do so at a low interest rate.

Answer 54

C. No. The directors alleged to have had a conflict may always prove the fairness of the transaction.

Question 55

The three directors of the Blue Moon Motel Co, together owned a parcel of property which they believe to be a prime motel site, located as it is just off a major interstate highway. They have had the property appraised. They now propose to convey to Blue Moon at the appraised value. At the directors’ meeting convened to approve the land transaction, one of the directors looks up and says, “A quorum of disinterested directors would be three. There are only two of us without any interest in the transaction. Counsel, what do we do?” What advice do you give?
A. Because you cannot obtain a quorum, the directors must convene a shareholders’ meeting and seek shareholder approval.
B. For quorum purposes, interested directors may be counted.
C. The board is paralyzed and cannot enter into the transaction.
D. If the directors forego shareholder approval, the transaction may be reviewed by a court under the entire fairness standard.

Answer 55

D. If the directors forego shareholder approval, the transaction may be reviewed by a court under the entire fairness standard.

Question 56

Weldon owns a number of gravel pits personally, but he also is a director and shareholder of a corporation, Pet Rocks Inc, which owns the second largest gravel pit in the area. Pet Rocks also owns an undivided one-third interest in the largest gravel pit in the area, the Crescent. Pet Rocks has made an offer to the owner of the second of the three interests in the Crescent and has received a counteroffer. As to the third of the three interests, after protracted negotiations to obtain a long-term leasehold, Pet Rocks was unable to close a deal. When he receives this news, Weldon approaches the two other Crescent owners to sell him both the second and third interests. Weldon breaks the impasse with one of the owners by promising to give the owner’s mother, who lives on the property, a life estate in her lot and flower garden. Weldon ends up nearly concerning the gravel market. Pet Rock’s directors are angry that Weldon, their colleague director, got the deal. Were Weldon’s actions appropriate?
A. No. He has usurped (diverted to his own use) a corporate opportunity, in breach of his duty of loyalty.
B. Weldon’s actions were inappropriate as to the second interest, but appropriate as to the third because Pet Rocks had made no attempt to obtain the third.
C. No. What Weldon did was not “fair.”
D. Weldon’s actions were inappropriate, but he could have avoided the trouble if he had resigned before approaching the owners of the other interests in the Crescent.

Answer 56

A. No. He has usurped (diverted to his own use) a corporate opportunity, in breach of his duty of loyalty.

Question 57

Brody has her own Delaware corporation - Brody, Ltd - which has speculated in Federal Communications Commission cellular telephone licenses. She holds licenses for several service areas and sits on the board of the local telephone company, Yelm Bell Co. Yelm is an old-fashioned local service provider with hard wires running from customers’ homes and businesses to Yelm’s exchanges. Several cellular licenses have come onto the local market, and Brody asks all of her Yelm director colleagues whether Yelm has an interest, but she does so individually rather than at a board meeting. They each say “no,” with the CEO adding that Yelm has little cash right now because it has been building out a cable television system. Brody and Brody, Ltd, then sign a contract to purchase the licenses. Before Brody Ltc, closes on the deal, Firstwave Communications, a full-service telecommunications company (cellular, internet access, cable television, and traditional telephone service) in a neighboring area, announces a merger with Yelm. Firstwave sues Brody and Brody, Ltd. Is there a corporate opportunity as to Yelm?
A. Yes, because a director may not divert an opportunity that rightfully belongs to the corporation’s prospective merger partner.
B. No, because Yelm’s line of business did not include cellular licenses, Bordy did not learn of it by virtue of her position, and Yelm has no interest or expectancy (indeed, it turned the deal down).
C. Yes, because cellular is a line of business in which Yelm might reasonably be expected to engage.
D. No, because Brody was in this business long before she became a member of the Yelm Telephone board of directors.

Answer 57

B. No, because Yelm’s line of business did not include cellular licenses, Bordy did not learn of it by virtue of her position, and Yelm has no interest or expectancy (indeed, it turned the deal down).

Question 58

Faulkner believes that Unlimited, Inc, a publicly-held corporation in which she owns shares, has made false or misleading disclosures relating to a merger agreement. To her chagrin, the annual meeting of the shareholders is not due to be held for eight months. In an attempt to bring public attention to this scandal, Faulkner wants to file a lawsuit against the corporation. She has delivered the board a procedurally proper notice of demand to inspect Unlimited’s list of shareholders. Faulkner explained in the notice that she wanted to see the list so that she could notify the other shareholders of the lawsuit. Unlimited’s board believes that Faulkner is requesting the list so that she may solicit other shareholders to join the suit. Accordingly, the board does not want Faulkner to get access to the shareholder list. Unlimited’s articles of incorporation and bylaws include the default rules for a shareholder’s rights of inspection of corporate records. Is Faulkner entitled to see the list of shareholders?
A. Yes. She has alleged a proper purpose to inspect the shareholder list.
B. No. Faulkner will not be entitled to inspect the list of shareholders until after notice for the next meeting is given.
C. No. This is just a “fishing expedition” to bolster her lawsuit.
D. Yes. Faulkner is entitled, as a matter of absolute right, to see the list of shareholders at any time for any reason.

Answer 58

A. Yes. She has alleged a proper purpose to inspect the shareholder list.

Question 59

Falconer is a disgruntled shareholder of Roadstar Inc, a small, publicly-held company with 150 shareholders and a five-person board. Falconer is disgruntled because a vendor just breached a contract for delivery of 1,000 widgets over the next two years. Falconer has learned that the vendor, Drummond Co, is owned by cousins of Manley, Roadstar’s CEO and largest shareholder. Manley’s brother, Stanley, also sits on the Roadstar board, as does their father, Randley. As a result of the cancellation, Roadstar stands to experience a financial loss for the first time in five years and will be unable to pay dividends this year. The stock value will also certainly decrease. The other two directors, Carlson and Winslow, rarely attend board meetings. Falconer is incensed because the board has done nothing regarding the breach and has allowed it to happen with nary a protest.
Does Falconer have a right to file a lawsuit against the board of directors on behalf of the corporation?
A. No. The business and affairs are managed by the board of directors and only they may commence a lawsuit.
B. No. A shareholder does not have a right to sue a board of directors under any circumstance.
C. No, but Falconer may file a suit on his own behalf against the corporation.
D. Yes, but Falconer will be subject to heightened procedural requirements.

Answer 59

D. Yes, but Falconer will be subject to heightened procedural requirements.

Question 60

Falconer has decided to pursue a lawsuit against the board of directors on behalf of the corporation. Specifically, Falconer believes that the board has breached its duty of loyalty by entering into a conflict-of-interest transaction to the detriment of the corporation and its duty of care by making bad decisions. Falconer has engaged your firm to discuss the steps moving forward and has asked if there is anything he is required to do before filing the lawsuit. What advice do you give?
A. Falconer can file the lawsuit immediately.
B. Falconer must first make a demand on the board of directors to cure the breach.
C. Falconer must acquire more stock to meet the threshold to have standing to file the suit.
D. Falconer must file a shareholder proposal to authorize the suit to move forward.

Answer 60

B. Falconer must first make a demand on the board of directors to cure the breach.

Question 61

Before Falconer can even make demand on the board, he obtains more “bad news.” At a Roadstar board meeting, the directors declared an extraordinary dividend of $30 per share (the stock sells for $15), payable only to those shareholders who have held shares for five years or longer. Falconer is one of five shareholders who has held shares in the corporation for less than years. Believing that the dividend payment is in retaliation for Falconer’s efforts to commence a lawsuit, he wishes to add to his lawsuit a challenge over the dividend payments. Is this additional claim a derivative claim on behalf of the corporation?
A. Yes, this is an additional claim that Falconer can assert derivatively on behalf of the corporation.
B. Yes, this is a derivative claim because Falconer is not the only shareholder to have been impacted by the dividend payment.
C. No, this is a claim that Falconer can assert directly, on his own behalf.
D. No, this is a valid exercise of business judgment and so Falconer cannot file a claim at all.

Answer 61

C. No, this is a claim that Falconer can assert directly, on his own behalf.

Question 62

After your initial consultation with Falconer and the troubles at Roadstar, you have done some research and discovered that the corporation has a six-member board. In addition to Manley, Manley’s father, and Manley’s brother, three other members sit on the board: an accountant, a lawyer, and a real estate agent. You reviewed their social media pages and discovered that the lawyer appears to be a close friend of the Manelys and frequently vacations with them. In your investigation, it seems that the accountant and the real estate agent run in the same circles as the Manleys, but you cannot find any direct evidence that they are particularly close. You are preparing a letter to Falconer to advise him as to whether you believe a court would excuse demand in this case as futile. Assume that Delaware applies. What advice do you give Falconer?
A. Demand is likely to be excused as futile because three members of the board (the Manleys) are self-interested in the challenged transaction and thus conflicted.
B. Demand is likely to be excused as futile because four members of the board (the Manleys and the attorney) are self-interested in the challenged transaction and thus conflicted.
C. Demand is likely to be excused as futile because all six members of the board are self-interested in the challenged transaction and thus conflicted.
D. Demand is not likely to be excused as futile.

Answer 62

A. Demand is likely to be excused as futile because three members of the board (the Manleys) are self-interested in the challenged transaction and thus conflicted.

Question 63

Falconer decided to proceed with the derivative lawsuit without first making a demand of the board. After receiving service of the lawsuit, the board appointed and referred the matter to a special litigation committee made up of the accountant and the real estate agent. The committee hired outside counsel to review the lawsuit and make a recommendation. Outside counsel issued a written opinion to the committee advising that Falconer’s lawsuit was not in the best interest of the corporation and should be dismissed. Accordingly, the special litigation committee voted that the lawsuit should be dismissed, and it noted that its decision was final and not subject to review of the other directors. Consistent with this report, the board filed a motion with the court to dismiss the lawsuit. Assume that Delaware law applies?
A. The court should deny the motion because Falconer was correct to file the lawsuit without first making a demand on the board of directors.
B. The court should deny the motion because it should make its own determination as to whether the lawsuit is in the best interest of the corporation.
C. The court should grant the motion because the special litigation committee was independent, acted in good faith, and made a reasonable recommendation.
D. The court should grant the motion because the special litigation committee was independent, acted in good faith, and made a reasonable recommendation.

Answer 63

D. The court should grant the motion because the special litigation committee was independent, acted in good faith, and made a reasonable recommendation.