BA MC

Question 1

Arturo tells his employee Charlie to rent a Ferrari for him from a nearby car rental enterprise. As soon as Charlie has left, Arturo calls the relevant car rental enterprise, states his name, and says: “I have sent my employee Charlie over to rent a car for me. He can rent any car as long as it is luxurious.” The employee in charge at the car rental enterprise concludes that Charlie has authority to rent a luxurious car for Arturo, no matter the brand. As it happens, the car rental no longer has Ferraris in store. Therefore, Charlie decides to rent a Bentley instead. Is Arturo bound to the contract, and, if so, why?

A Arturo is bound to the contract because Charlie acted with actual authority.
Incorrect. In the case at hand, Charlie acted with
B Arturo is bound to the contract because Charlie acted with apparent authority.
C Arturo is bound to the contract because the contract was ratified.
D Arturo is bound to the contract because of estoppel

Answer 1

B

Correct. It is clear that a contract was formed because the agreement between Charlie and the car rental company involved both mutual assent and consideration. The decisive question, though, is whether and how that contract binds Arturo.

Question 2

Peter sends his employee Raphael to buy a pizza at Casey’s Italian restaurant. Raphael tells Casey that he, Raphael, is acting for Peter. Secretly, though, Raphael wants the contract to be between himself and Casey. Casey, taking Raphael at his word, assumes that the latter is acting on behalf of Peter. Has a contract been formed between Casey and Peter?
A Yes, because Raphael acted with actual authority and because Casey reasonably assumed that Raphael was Peter’s agent
B Yes, because Raphael acted with apparent authority and because Casey reasonably assumed that Raphael was Peter’s agent.
C No, because Raphael did not have authority.
D No, because Raphael acted for himself rather than for Peter.

Answer 2

A

It is clear that a contract was formed because the agreement between Raphael and Casey was based on mutual assent and consideration. The decisive question, though, is whether that contract binds Peter. This depends on whether Raphael as Peter’s agent has managed to bind Peter to the contract.

Question 3

Nyusha, who owns and operates a ranch, tells her employee Dylan to go see Marcus, a horse trader, and inquire if he has any good horses to sell. Nyusha also tells Dylan not to buy any animals yet but simply to report back on what Marcus might be offering. Dylan goes to Marcus and tells him that she is looking to buy some horses for Nyusha. He offers her a white horse for $20,000 and a black horse for $25,000. Disregarding her instructions, Dylan buys both horses in Nyusha’s name as part of a single transaction for a total price of $45,000. The contract is in writing and signed by both Dylan and Nyusha. Dylan purchased the horses because she is convinced that Nyusha will be o.k. with the deal. When she reports back to Nyusha, the latter is shocked. Nyusha then visits Marcus, tells him that Dylan was not allowed to buy anything and also says: “I like the black horse, so I will pay you the $25,000, but I am not taking the white horse.” Marcus, who has another willing buyer for both horses, tells Nyusha to “get lost.” Does Nyusha have any rights against Marcus?

A Yes, because Dylan acted with actual authority.
B Yes, because Dylan acted with apparent authority.
C Yes, because Nyusha ratified the contract.
D No.

Answer 3

D

Correct. It is clear that a contract was formed because the agreement signed by Dylan and Marcus was based on mutual assent and consideration. Also, the contract was in writing and signed by both parties, such that the writing requirement in § 2–201 of the Uniform Commercial Code for sales contracts for $500 or more was satisfied. The question, though, is whether Nyusha can derive any rights from this contract.

Question 4

Fatima owns and operates a bookstore called “Best Books.” When she has to leave town for a month to take care of her sick mother, she asks her friend Maya to fill in for her while she is gone. Maya agrees. On the first day that Maya takes care of the store, she notices that the store does not have any books in stock by the popular author Ronny Miegel. Therefore, Maya calls the publisher, George, and, making it clear that she acts for Best Books, orders ten new copies of Miegel’s most recent book for a total price of $300. The publisher assumes that Maya is the owner and operator of Best Books. The books are promptly delivered. Unbeknownst to Maya, Fatima does not like Miegel, and when she returns after a month and learns that Maya has bought ten copies of Miegel’s most recent book, Fatima calls George, explains to him that Maya was just filling in, and tells him that she, Fatima, “is not o.k. with the purchase” and “won’t be held liable for the books.” Are Maya and/or Fatima liable to George?

A Fatima is liable to George, and so is Maya.
B Fatima is liable to George, but Maya is not.
C Fatima is not liable to George, but Maya is.
D Fatima is not liable to George, and neither is Maya.

Answer 4

A

Correct. It is clear that a contract was formed because the contract was based on mutual assent and consideration (the promise to deliver ten books in exchange for the promise to pay $300). Also note that the total price was not high enough to subject the contract to the writing requirement in § 2–201 of the Uniform Commercial Code for sales contracts for $500 or more. (In any case, once goods have been delivered and accepted, the contract is enforceable even if it was not in writing, UCC § 2-201(3)(c).

Question 5

Genevieve owns and operates a garage. She has seven mechanics working for her, including Kenji, who has only recently become Genevieve’s employee. Every morning at 6 a.m., the mechanics come in, and the work begins. Genevieve then assigns Kenji what she calls “the first job of the day”—getting breakfast for everyone from a nearby fast food restaurant. Kenji originally tried to refuse, but Genevieve pointed out that she was not only giving him money for the purchase but also reimbursing him for the cost of the gas. She also noted that having one employee purchase breakfast for the whole group saved time and allowed the others to get more work done. One day, when Kenji is sent off to get breakfast, he is still tired and negligently damages a car belonging to a person named Travis while trying to park his own. Who is liable for the damage?

A Kenji is liable to Travis, but Genevieve is not.
B Genevieve is liable to Travis, but Kenji is not.
C Genevieve is liable to Travis, and so is Kenji.
D Genevieve is not liable to Travis, and neither is Kenji.

Answer 5

C

Question 6

Carl is a wealthy landowner. One fine day, he learns that one of the neighboring ranches will be auctioned and decides to try and buy it. Unfortunately for Carl, the auction will take place on July 1, when Carl will be spending his summer vacation in Europe. He therefore instructs his secretary, Gino, to attend the auction in Carl’s name and bid up to $5,000,000 for the property. Gino has never before bought any land in Carl’s name, but he has frequently undertaken minor purchases for Carl such as buying flowers for Carl’s garden or toys for Carl’s children.
On the day of the auction, there are several bidders who try to purchase the ranch in question, and in the heat of the bidding war, Gino gets carried away. He wins the auction but only after bidding $5,500,000. After realizing that he has exceeded the limit imposed by Carl, Gino is panicked. At that moment, another bidder, Louis, walks up to Gino and offers to buy a particular piece of land that forms part of the ranch for $500,000. Gino, explicitly acting in Carl’s name, gladly accepts, and they both sign a written sales contract to this effect. Because the relevant part of the land amounts to only 5% of the overall area of the ranch, Gino is sure that Carl will not mind.

Two weeks later, Carl returns from this vacation. Gino confesses that he has acquired the ranch for $5,500,000 but forgets to mention that he also sold part of the property. Carl is shocked but says: “Well, what’s done is done, I would rather overpay than not get the ranch at all.” He then pays the $5,500,000, and the property is transferred to Carl. A week later, Louis contacts Carl and points out that he, Louis, has bought part of the ranch. Carl flatly tells him that he does not feel bound by the contract signed by Gino and Louis. Which of the following statements is correct?

A Neither the contract in the amount of $5,500,000 nor the contract in the amount of $500,000 binds Carl.
B The contract in the amount of $5,500,000 binds Carl, whereas the contract in the amount of $500,000 does not bind Carl.
C The contract in the amount of $500,000 binds Carl, whereas the contract in the amount of $5,500,000 does not bind Carl.
D Both contracts bind Carl.

Answer 6

B

Question 7

Gerard is an eccentric billionaire living in Big City. One day, Jeff, one of Gerard’s personal assistants, reports to him that a scam artist named Joe seems to be making the rounds in Big City. Joe’s modus operandi is as follows: Joe visits luxury car dealerships and pretends to be working for Gerard. Acting in Gerard’s name, Joe then acquires luxury cars and drives them away, promising that Gerard will pay within the next 30 days. So far, no one has realized that Joe is a scam artist except Jeff and Gerard. Jeff points out that Joe has already defrauded six of Big City’s seven luxury car dealerships, and Jeff proposes warning the seventh so that it does not fall victim to the same trick. However, Gerard replies: “No, this is far too amusing. Let’s just wait and see if that store is as dumb as the others.” Two days later, Joe visits the seventh luxury car dealership, which is owned and operated by Susan. Susan has already heard that Joe has been buying luxury cars for Gerard but does not realize that Joe is a scam artist. Therefore, she readily agrees to sell a new Mercedes at a price of $120,000. They both sign the contract, and as usual, Joe does so in Gerard’s name. Then Joe drives away in the Mercedes and is never heard of again. After a while, Susan asks Gerard to pay for the Mercedes. However, Gerard refuses, pointing out that Joe was just a scam artist abusing Gerard’s good name. Who, if anyone, is liable to Susan?

A Both Joe and Gerard are liable to Susan.
B Joe is liable, but Gerard is not..
C Gerard is liable to Susan, but Joe is not.
D Neither Joe nor Gerard is liable to Susan.

Answer 7

A

Question 8

On January 1, Maria and Reuben decide to open a law firm (“Maria & Reuben Law Partners”). They agree that the firm will open its doors to the public on January 15. On January 5, Reuben, acting in the name of “Maria & Reuben Law Partners,” calls Peter, a printer, and orders 5000 business cards. When, on January 6, Maria learns of this order, she promptly calls Peter and tells him that she does not approve of the purchase and “won’t be held responsible.” Peter insists that both Reuben and Maria are liable to him. Can Peter hold Maria and/or Reuben personally liable?

A Reuben and Maria are jointly and severally liable to Peter.

B Reuben is liable to Peter, but Maria is not.

C Maria is liable to Peter, but Reuben is not.

D Maria is not liable to Peter, and neither is Reuben.

Answer 8

A

Correct. According to UPA § 15, RUPA § 306, all partners are jointly and severally liable for the debts of a partnership.

Has a partnership been formed? Under UPA § 6(1), RUPA § 202(a), the formation of a partnership requires (a) an association of two or more persons (b) to carry on a business (c) as co-owners (d) for profit. A law firm constitutes a business within the meaning of these provisions (cf. RUPA § 101(1)), and it is reasonable to assume that Reuben and Maria intend to make a profit. Furthermore, Reuben and Maria are two persons forming an association. Moreover, the fact that the law firm had not opened its doors to the public is irrelevant. Rather, it is sufficient that the carrying on of a business is the purpose of the association. Hence, a partnership was created on January 1. Given that Reuben and Maria are partners in that partnership, they are both jointly and severally liable.

Question 9

On January 1, Rosalind and Viola agree to launch a repertory theater company together. Under the written “theater company agreement,” which they both sign, each of them shall get 50% of the profits. On January 10, Rosalind negligently causes a traffic accident while delivering some promotional materials, a task that she undertakes several times a week. As a result of that accident, a pedestrian, Will, is injured and incurs medical costs in the amount of $100,000. On January 15, Rosalind and Viola sign an agreement with Cordelia, according to which Cordelia “joins the firm.” The agreement also provides that henceforth, Rosalind, Viola, and Cordelia shall each be entitled to one-third of the profits made by the theater company. In the following, the firm sells off its assets to be able to pay Will, but even after all assets are sold, only $60,000 out of the $100,000 have been paid. Are any of the three entrepreneurs (Rosalind, Viola, and Cordelia) personally liable to Will with respect to the remaining $40,000?

A Rosalind is liable to Will, but Viola and Cordelia are not.

B Rosalind and Viola are jointly and severally liable to Will, but Cordelia is not.

C Rosalind, Viola, and Cordelia are jointly and severally liable to Will.

D Neither Rosalind nor Viola nor Cordelia is liable to Will.

Answer 9

B

Correct. According to UPA § 15, RUPA § 306, all partners are jointly and severally liable for the debts of the partnership. In the case at hand, the firm constitutes a partnership because Rosalind and Viola (and later Cordelia) formed an association of two or more persons to carry on a business as co-owners for profit (cf. UPA § 6(1), RUPA § 202(a)). Does the liability towards Will constitute a debt of the partnership? A partnership is liable for any wrongful act that a partner has committed either with authority or in the ordinary course of business of the partnership, UPA § 13, RUPA § 305(a). Given that the delivery of promotional materials was part of the company’s ordinary course of business, the partnership is liable for the tort (negligence) that Rosalind committed when she caused the accident. It follows that Rosalind and Viola, at least, are jointly and severally liable.

But what about Cordelia? When she signed the agreement with Rosalind and Viola, she also became one of the partners (cf. RUPA § 401(i)). However, an incoming partner is not personally liable for “old debts,” i.e., liabilities incurred before the new partner joined the partnership, UPA § 17, RUPA § 306(b). In other words, the creditor can lay his hands on all the partnership assets, even those contributed by the new partner, but the creditor cannot touch the personal assets of the incoming partner. In other words, Cordelia is not liable to Will.

Question 10

On January 1, Alexei and his brothers Ivan and Dmitri start a comic book store together in a state that has adopted the Revised Uniform Partnership Act. The three brothers all sign an agreement under which Alexei and Ivan each get 30 percent of the profits, whereas Dmitri gets the remaining 40 percent. The agreement does not mention losses. The partnership agreement further provides that each of the three brothers shall contribute $15,000 in cash to the firm. On February 1, all three partners pay their promised contributions. In the first six months of the year, the firm incurs a net loss in the amount of $10,000. From June 1 to December 31, the partnership makes a net profit in the amount of $100,000. From January 1 to December 31, the partnership never pays any money to Alexei or Ivan. By contrast, the partnership pays Dmitri $5,000 on December 1, and another $2,000 on December 15. What do the partners’ accounts look like on December 31?

A Each of the three brothers’ accounts shows a plus of $72,000.

B The accounts of Alexei and Ivan show a plus of $42,000. Dmitri’s account shows a plus of $51,000.

C The accounts of Alexei and Ivan show a plus of $42,000. Dmitri’s account shows a plus of $44,000.

D None of the answers above is correct.

Answer 10

C

According to RUPA § 401(a), each partner is deemed to have an account. Let us start with Alexei’s account. On February 1, Alexei made a contribution in the amount of $15,000. Contributions are credited to the partner’s account, RUPA § 401(a)(1). That same year, however, the partnership made a loss in the amount of $10,000. Because each partner has to bear a share of the losses equal to his share of the profits, RUPA § 401(b), and because Alexei was to get 30 percent of the profits, Alexei has to bear $3,000 of the loss. Under RUPA § 401(a)(2), each partner’s account is charged with his share of the partnership losses, so the amount of $3,000 is charged to his account. That leaves Alexei with 12,000 at the end of the first six months.

In the second half of the year, the partnership made a profit in the amount of $100,000, and under the distribution rule chosen by the partnership, Alexei gets $30,000 out of the $100,000. Accordingly, the $30,000 is credited to his account, RUPA § 401(a)(1). If one sums up these various entries, Alexei’s account shows a positive balance of $42,000.

Ivan, of course, is in exactly the same position as Alexei, so Ivan’s account will show the same entries as Alexei’s account, leading to a positive balance of $42,000.

Dmitri’s account, by contrast, looks somewhat different. On February 1, Dmitri also made a contribution of $15,000, which is credited to his account. However, because under the partnership agreement, Dmitri was to get 40 percent rather than 30 percent of the profits made by the partnership (and therefore has to bear an equal proportion of the losses, RUPA § 401(b), his account is charged with $4,000 rather than $3,000 during the first six months. Hence, at the end of the first six months, Dmitri’s account shows a positive balance of $15,000 - $ 4000 = $11,000.

In the second half of the year, Dmitri’s account is credited with $40,000, namely his share of the profits. However, in December Dmitri received two distributions totaling $7000, and under RUPA § 401(b), distributions are charged to the partner’s account. Accordingly, on December 1, his account shows a positive balance of $11,000 + $40,000 - $7000 = $44,000.

Question 11

Fred, George, and Percy are partners in a partnership that owns and operates a store for fine foods. Under the partnership agreement, only Fred and George are to manage the business, whereas Percy has no right or duty to participate in the firm’s management; his sole role is to contribute money. On Sunday, January 13, Percy visits the store and notices that the roof of the shop is leaking. He tries to contact Fred and George but cannot reach either one. Therefore, Percy calls a repairman. The repairman comes right away and fixes the roof, but Percy has to pay him $150. Percy uses his own personal credit card because he does not have access to the partnership’s bank account. Can Percy demand to be reimbursed?

A
Yes, but only to the extent that the partnership is unjustly enriched.

B
Yes, and that is true regardless of whether the elements of an unjust enrichment claim are present.

C
No, because Percy was not entitled to interfere with the management of the partnership.

D
None of the answer choices above is correct.

Answer 11

B

Correct. Under UPA § 18(b), RUPA § 401(c), a partnership will reimburse a partner for payments made for the preservation of partnership property. In the case at hand, the repairs were necessary for the preservation of the partnership property, and Percy can therefore demand to be reimbursed.

Question 12

Fred, George, and Percy are partners in a partnership that owns and operates a store for fine foods. On January 5, the brothers buy a car for the enterprise. One day, after the shop has closed, Percy takes the car for a ride to pick up his girlfriend Penelope. He mentioned this to George in advance, and George said he was o.k. with it. Neither George nor Percy notified Fred. Has Percy violated his duties as a partner?

A
Yes, because Fred did not consent to the use of the car.

B
Yes, and this would be true even if Fred, too, had consented to the use of the car.

C
No, because two of the three partners consented to the use of the car.

D
No, and this would be true even if George had not consented to the use of the car.

Answer 12

A

Correct. Under UPA § 25(2)(a), RUPA § 401(g), a partner may possess partnership property only for partnership purposes. An exception applies where all other partners consent, but that was not the case here.

Question 13

Fred, George, and Percy are partners in a partnership that owns and operates a store for fine foods. Soon, the brothers find themselves arguing over whether to buy caviar for the store. Percy has ethical objections to this purchase. Fred and George are in favor of it. Do Fred and George violate their duties towards Percy if they buy some caviar on behalf of the partnership?

A
Yes, because Percy did not consent to the purchase.

B
No, because two out of three partners favored the purchase.

C
No, in fact, even if two partners had opposed the purchase, the third partner could have purchased the caviar for the partnership without violating his duties.

D
None of the answer choices above is correct.

Answer 13

B

Correct. The general default rule is that each partner is allowed to undertake acts that are within the ordinary course of business of the partnership. However, under UPA § 18(h), RUPA § 401(j), differences arising regarding matters in the ordinary course of business of a partnership can be decided by a majority of the partners. In the case at hand, buying caviar is a matter in the ordinary course of business for a fine foods store. Accordingly, the matter could be decided by a simple majority of the partners. Hence, George and Fred did not violate their duties.

Question 14

Fred, George, and Percy are partners in a partnership that owns and operates a record store. As it turns out, Percy, who is a rather annoying fellow, scares off most of the customers. Therefore, George and Fred tell him: “Look, you can remain a co-owner of the enterprise, but leave the running of the business to us. You are way too embarrassing.” Does Percy have to comply?

A
Yes, because questions pertaining to the running of the business can be decided by a simple majority of the partners.

B
Yes, but only because George and Fred had a legitimate reason to exclude Percy from the running of the business.

C
No, because every partner has a right to participate in the management of the firm.

D
None of the answer choices above is correct.

Answer 14

C

Correct. Under UPA § 18(e), RUPA § 401(f), the default rule is that all partners have “equal rights in the management and conduct of the partnership business.” While the partnership agreement can deviate from this principle, there are no indications that the agreement between Percy, George, and Fred opted out of the legal default. Moreover, in order to amend the partnership agreement, a unanimous consensus among the partners is needed. This is explicitly stated in RUPA § 401(j), and the same is true under the Uniform Partnership Act (1914).

Question 15

Fred, George, and Percy are partners in a partnership that owns and operates a car parts store. Ginevra, their younger sister, wants to join the enterprise. She has an MBA from a top business school. Contrary to Percy’s wishes, Fred and George enter into a written agreement with Ginevra, according to which she becomes a co-owner of the enterprise. Does the partnership now include Ginevra as a partner?

A
Yes, because the admission of new partners can be decided by a majority of the partners.

B
Yes, but only because Percy could not, in good faith, refuse to admit Ginevra as a partner.

C
No, because the admission of new partners requires the consent of all the existing partners.

D
None of the answer choices above is correct.

Answer 15

C

Correct. Under UPA § 18(g), RUPA § 401(i), the general default rule is that a person can only become a partner with the consent of all existing partners. Given that Percy refuses to agree to Ginevra’s admission to the partnership, she cannot become a partner.

Question 16

Homer, Ovid, and Lucan are partners in a partnership that owns and operates a bicycle store. The partnership is governed by the RUPA. On March 1, Homer tells Lucan that he wants to see the firm’s books. Lucan refuses. He points out, truthfully, that the written agreement between the partners contains the following clause: “Lucan will be the firm’s bookkeeper. No one else shall have access to the firm’s books.” Does Homer have a right to see the books anyhow? Can Homer demand that the books also be shown to his attorney, Horace?

A
Homer has a right to see the books, and he can also demand that the books also be shown to his attorney, Horace.

B
Homer has a right to see the books, but he cannot demand that the books also be shown to his attorney, Horace.

C
Homer has no right to see the books, but he can demand that the books be shown to his attorney, Horace.

D
Homer has no right to see the books, and he cannot demand that the books be shown to his attorney Horace.

Answer 16

A

Correct. Under RUPA § 403(b), a partner has the right to inspect the partnership’s books. RUPA § 403(b) also makes it clear that the partner’s “agents and attorneys” may inspect the book as well. Moreover, these rights cannot be “unreasonably restricted”, RUPA § 103(b)(2). Accordingly, the provision in the partnership agreement that prohibits partners other than Lucan from inspecting the books is void.

Question 17

Thelma and Louise run a store that only sells firecrackers. Effective January 1, the state legislature enacts a statute prohibiting the sale of firecrackers for safety reasons. However, only thirty days later, the legislature repeals that statute. Thelma and Louise want to know what the legal status of their firm is. Assuming that the firm is governed by the RUPA, has the partnership been dissolved, and is it still dissolved?

A
The partnership was dissolved when the first statute became effective, but, due to the second statute, we treat the partnership as though it had never been dissolved.

B
The partnership was dissolved by the first statute and remains dissolved despite the second statute.

C
The partnership was dissolved by the first statute, but was newly formed when the second statute went into effect.

D
The partnership was never dissolved in the first place, and this would be true even if the second statute had not been enacted.

Answer 17

A

Note, first, that the firm is a partnership because Thelma and Louise have formed an association of two persons to carry on a for-profit business as co-owners, RUPA § 202(a). A partnership is dissolved when its business becomes illegal, RUPA § 801(4). Accordingly, the first statute caused the dissolution of the partnership. However, under RUPA § 801(4), “a cure of illegality within 90 days after notice of the partnership of the event is effective retroactive to the date of the event for purposes of this section.” In other words, if the business becomes legal again within 90 days, then we treat the partnership as though it had never been dissolved. In the case at hand, only 30 days passed between the two laws, meaning that the firecracker store partnership is treated as though it had never been dissolved.

Question 18

On January 1, Larry, Moe, and Bearle sign a written “partnership agreement” according to which they shall form, own, and operate a book store. The agreement provides that each of the three shall receive one-third of the profits. The agreement also contains the following provisions:

“This partnership shall last ten years. However, any partner can be expelled at any time if the other partners unanimously agree that he or she should be expelled.”

In the following months, Larry complains regularly about the state of the firm’s business. Moe and Bearle are more optimistic, and they grow tired of Larry’s constant complaints. Therefore, on December 31, when Larry, Moe, and Bearle meet, Moe and Bearle vote to expel Larry. Which, if any, of the following statements is correct?

A
Larry has been dissociated from the partnership, but the other two partners violated their fiduciary duties when they expelled Larry.

B
Larry has not been dissociated from the partnership, but only because the other two partners violated their fiduciary duties when they expelled Larry.

C
Larry has not been dissociated from the partnership because partners cannot be expelled without good cause, and this rule is mandatory.

D
Larry has been dissociated from the partnership, and the other partners did not violate their fiduciary duties.

Answer 18

D

ccording to RUPA § 601(3), a partner may be expelled from the partnership pursuant to a provision in the partnership agreement. The UPA contains no explicit rule of this type, but the same principle applies under the UPA since the partners are free to shape the internal structure of the partnership via agreement. Here, Moe and Bearle have made use of their right to expel Larry, and there is no indication that they violated their fiduciary duties in doing so.

Question 19

What sorts of entities can be partners in a partnership?

A
A natural person, a corporation, a trust, and a partnership.

B
A natural person, a corporation, a trust, but not a partnership.

C
A natural person, a corporation, a partnership, but not a trust.

D
A natural person, a trust, a partnership, but not a corporation.

Answer 19

A

The formation of a partnership requires an association of two or more persons to carry on a for-profit business as co-owners, UPA § 6(1), RUPA 202(a). However, the term “person” is defined generously in this context. According to RUPA § 101(10), the term “person” includes, inter alia, an individual, a corporation, a trust, and a partnership. Under UPA § 2, the term “person” covers individuals, corporations, partnerships, and “other associations.” Because a trust is another association within the meaning of this provision, it can be a partner under the UPA.

Question 20

On January 1, Brad, Tom, and Sandy agree that they will start a bakery together and that each of them will get one-third of the profits. They also agree, without putting it into writing, that the firm shall go on for “at least 10 months even if business is horrible.” On January 15, the bakery opens its doors to the public.

Soon afterward, the three have a bitter disagreement about whether to use solely organic flour or non-organic flour as well. During a heated discussion on January 20, Tom says: “This firm is finished, let’s shut the whole thing down.” Brad replies: “Oh yeah? Fine with me, this business is over.” Sandy simply says: “I agree.” On January 25, Sandy dies in a traffic accident. On January 30, Brad dies of a heart attack. Has the partnership been dissolved and, if so, when?

A
The partnership was dissolved on January 20.

B
The partnership was dissolved on January 25.

C
The partnership was dissolved on January 30.

D
The partnership has not been dissolved

Answer 20

A

Because the partners had agreed on a minimum duration for their partnership, the partnership was a partnership for a definite term within the meaning of UPA § 31(1)(a), RUPA § 801(2). (After ten months, the partnership would have transformed into an at-will-partnership within the meaning of UPA § 31(1)(b), RUPA §§ 101(8), 801(1). However, even partnerships for a definite term can be dissolved before the expiration of that term. In particular, a partnership for a definite term can be dissolved by unanimous agreement of the partners, UPA § 31(1)(c), RUPA § 801(2)(ii). On January 20, all three of the partners consented to the dissolution of the partnership. Therefore, the partnership was dissolved that day.

Question 21

Four once-famous musicians, Mick, Keith, Charlie, and Ron, leave their retirement to undertake a four-month comeback tour that shall take them across all continents. They agree that they will stay together at least as long as it takes to complete the comeback tour, and they also agree that each of them shall get one-quarter of the profits from the tour. However, only two weeks into the tour, Keith surprisingly dies after falling off a palm tree. Mick wants to go on nonetheless, but Charlie and Ron declare that they want to wind up the business. One week later, Ron dies of a drug overdose. Has the partnership been dissolved and, if so, when? Assume that the state whose law governs this case has adopted the RUPA.

A
The partnership was dissolved when Keith died.

B
The partnership was dissolved when Charlie and Ron declared that they wanted to wind up the business.

C
The partnership was dissolved when Ron died.

D
The partnership has not been dissolved.

Answer 21

B

The musicians formed a partnership was because they formed an association to carry on, as co-owners, a for-profit business, UPA § 6, RUPA § 202(a). Since the four musicians had agreed to stay together for at least as long as it would take to complete the tour, the partnership was for a definite term or undertaking within the meaning of UPA § 31(1)(a), RUPA § 801(2).

The question of when the partnership was dissolved depends on whether the case is governed by the 1997 RUPA or by the old 1914 UPA. Under the RUPA, the death of a partner does not dissolve the partnership if at least two other partners remain; rather, the partner’s death will only cause that partner’s dissociation from the partnership under RUPA § 601(7)(i). Under the old UPA (1914), the death of any partner will dissolve the partnership under UPA § 31(4). Given that the question stipulates that the case is governed by the RUPA, the partnership was not dissolved when Keith died.

However, Keith’s death is nonetheless important. According to RUPA § 801(2)(i), a partnership for a definite term or particular undertaking is dissolved if, within 90 days after a partner’s dissociation by death, at least half of the remaining partners express their wish to wind up the partnership business. In the case at hand, only three partners remained after Keith’s death, and two of them wanted to wind up the partnership business. Accordingly, the partnership was dissolved when Charlie and Ron declared that they wanted to wind up the business.

Note that if Charlie and Ron had not declared their wish to wind up the partnership business, then the partnership would not have been dissolved at all, not even when Ron died. As previously noted, under the RUPA, the death of a partner does not dissolve the partnership if at least two other partners remain, and that was the case here because even after Keith and Ron died, Mick and Charlie remained.

Question 22

Giles and Anya own and operate a magic shop together. The statement of partnership authority that they have filed makes it clear that under the partnership agreement neither Anya nor Giles is allowed to enter into contracts for more than $400. One day, Giles, claiming to act for the partnership, enters into a contract with Willow according to which the partnership will pay Willow $450 for two secondhand spellbooks. Assume that Willow did not know and was not notified of the restriction on Giles’ authority to act for the partnership. Furthermore, assume that the case is governed by the RUPA. Has the purchase created a partnership liability?

A
Yes, because the partnership agreement cannot limit a partner’s authority to enter into transactions in the ordinary course of business.

B
Yes, because the statement of partnership authority cannot be invoked to Willow’s detriment.

C
No, because the partnership agreement limited the authority of the partners. This would be true even if no statement of partnership authority had been filed.

D
No, but only because of the statement of partnership authority.

Answer 22

B

As a general rule, each partner has the authority to enter into transactions in the normal course of the partnership business, and her actions bind the partnership vis-à-vis third parties, UPA § 9(1), RUPA § 301(1). Within the partnership agreement, the authority of some or all of the partners can be curtailed. However, even when the partnership limits the authority of the partners, the partner may still be able to bind the partnership vis-à-vis third parties, cf. UPA § 9, RUPA § 301. In other words, the fact that the partner was not allowed to act for the partnership does not necessarily mean that his actions don’t bind the partnership. To what extent third parties are protected in this situation depends on whether it is the RUPA or the UPA which applies.

Under the UPA, an act “for apparently carrying on in the usual way the business of the partnership” binds the partnership unless the third party “has knowledge of the fact” that the partner lacks authority, § 9(1) UPA. Under the RUPA, an act “for apparently carrying on in the ordinary course the partnership business” binds the partnership unless the third party “knew or had received a notification that the partner lacked authority,” RUPA § 301(1). In the case at hand, the purchase was a typical purchase for a bookstore, and Willow neither knew nor had received notification that Giles lacked authority to enter into the transaction. Therefore, the contract binds the partnership regardless of whether one applies the RUPA or the UPA.

But what about the statement of partnership authority? Whereas the UPA does not provide for such statements, the RUPA gives the partners the option of filing a statement of partnership authority, which may describe the limitations on the authority of the partners, RUPA § 303(a)(2). As a general rule, though, a third party is not deemed to know of a limitation on authority simply because that limitation is mentioned in a statement of partnership authority, RUPA § 303(f). The only exception to this rule concerns the transfer of real estate: under RUPA § 303(e), “a person not a partner is deemed to know of a limitation on the authority of a partner to transfer real property held in the name of the partnership if a certified copy of the filed statement containing the limitation on authority is of record in the office for recording transfers of that real property.” In the case at hand, the transaction had nothing to do with real estate, so that the statement of partnership authority could not be invoked to Willow’s detriment.

Question 23

Harry and Sally decide to start an enterprise selling hats. On January 1, they both sign a “business agreement.” According to that agreement, Harry is to contribute $50,000 and will receive 20% of the profits, but he will not bear any of the losses. Sally is to get 80% of the profits. In addition, Sally is to bear all the losses and do all the work. The written agreement also stipulates that Sally can decide, without Harry’s consent, to let the business obtain loans up to $200,000. The written agreement between Harry and Sally furthermore contains the following clause: “This is not a partnership, but a joint venture. Only Sally will be liable to third parties.”

Subsequently, Harry contributes the promised $50,000. Nonetheless, the firm soon runs out of cash. Harry makes it clear to Sally that he, Harry, does not want the firm to take on any loans. Furthermore, Harry contacts all local banks and lets them know that he has instructed Sally “not to take on any loans for the joint venture.” On April 1, however, Sally, acting in the name of the enterprise, requests and obtains a loan from a local bank in the amount of $10,000. The firm’s business is not going well, and by May 1, the firm no longer has any assets. Assume that the applicable state law is identical to the RUPA (1997). Can the bank hold Harry personally liable for all or at least part of the $10,000?

A
Yes, Harry is personally liable to the bank for the full $10,000.

B
Yes, Harry is personally liable to the bank, but only in the amount of $5,000.

C
No, Harry is not personally liable because the firm was not a partnership.

D
No, Harry is not personally liable because the bank knew that Harry was opposed to the loan.

Answer 23

A

Note, first, that the firm is a partnership because Harry and Sally have formed an association of two persons to carry on a for-profit business as co-owners, UPA § 6(1), RUPA § 202(a). If these conditions are met, the partnership is formed regardless of whether the partners wanted to form a partnership. This is expressly noted in RUPA § 202(a), but is true under the UPA as well. In particular, the fact that the parties called their firm a “joint venture” does not prevent the formation of a partnership. Also note that Harry is a partner rather than, say, a mere lender. Harry and Sally were to share the profits, so the presumption in favor of a partnership under RUPA § 202(c)(3) applies. The mere fact that Sally alone was to bear any loss is insufficient to rebut that presumption. Hence, all of the conditions for the formation of a partnership are satisfied.

Sally created a partnership liability when she took on the loan. The allocation of authority in a partnership is determined, first and foremost, by the partnership agreement, RUPA § 103(a). If the partnership agreement is silent, then each partner has the authority to enter into transactions in the normal course of the partnership business. When, in the ordinary course of business, a difference arises between the partners regarding some matter, that matter can be decided by a simple majority, UPA § 18(h), RUPA § 401(j). How that rule applies when there are only two partners is controversial; courts disagree regarding whether a partner has authority to undertake a transaction if the only other party has indicated that he opposes the relevant transaction. In the case at hand, however, this controversy is without relevance. That is because the partnership agreement explicitly gives Sally the authority to obtain loans of up to $200,000 for the partnership, and Harry cannot unilaterally eliminate this authority. Rather, the partnership agreement can only be changed with the consent of all the partners. It follows that Sally had the authority necessary to obtain the loan, and her actions therefore bound the partnership under UPA § 9(1), RUPA § 301(1).

As a general rule, the partners are jointly and severally liable for all of the partnership’s debts, RUPA § 306(a). The UPA imposes joint liability for contractual obligations of the partnership, UPA § 15(b). Either way, each partner is liable for the full amount, though the bank cannot obtain the full amount more than once. Moreover, the provision in the partnership agreement, according to which only Sally shall be personally liable, has no effect vis-à-vis the bank. While RUPA § 306(a) allows the partners to limit their personal liability via an agreement with the creditor, mere agreements between the partners cannot limit the partners’ liability vis-à-vis third parties. In sum, Harry is personally liable for the full amount.

Question 24

On January 1, Bruce, Arnold, Denzel, Jackie, and Sylvester start a restaurant together. They have agreed to keep the firm running until December 31. However, on January 11, Bruce dies in a high-speed car chase. At a meeting on January 12, Denzel and Jackie want to keep going, but Arnold and Sylvester express their wish to wind up the firm’s business. On January 20, Jackie buys twenty new restaurant tables from Tom. Tom has been familiar with the restaurant since it was formed. Moreover, at the moment of the purchase, Tom does not know that Bruce has died, or that Arnold and Sylvester have expressed their wish to wind up the firm’s business. As no news of the events at the restaurant was mentioned in any newspaper, Tom could not have been expected to know more than he does about the matter. Does the contract with Tom still bind the partnership? Assume that the RUPA is the applicable law.

A
The contract with Tom does not bind the partnership because the partnership has been dissolved and therefore no longer exists.

B
The contract with Tom does not bind the partnership. Even though the partnership did exist at the moment of the transaction, Jackie did not have the authority to bind the partnership.

C
The contract with Tom binds the partnership but only because Tom did not know, and did not have reason to know, of the partnership’s dissolution.

D
The contract with Tom binds the partnership, and the partnership has not been dissolved.

Answer 24

C

This partnership was dissolved regardless of whether one applies the RUPA or the UPA. The timing of the dissolution does, however, depend on whether it is the UPA or the RUPA that is applicable. The death of any partner will dissolve the partnership under UPA § 31(4). Under the RUPA however, the death of a partner does not dissolve the partnership if at least two other partners remain; rather, the partner’s death will only cause that partner’s dissociation from the partnership under RUPA § 601(7)(i). In other words, Bruce’s death would have dissolved the partnership if it were governed by the UPA, but since the RUPA applies, Bruce’s death does not dissolve the partnership. However, under RUPA § 801(2)(i), a partnership for a definite term or particular undertaking is dissolved if, within 90 days after a partner’s dissociation by death, at least half of the remaining partners express their wish to wind up the partnership business. In the case at hand, four partners remained after Bruce’s death, and two of them wanted to wind up the partnership business. Accordingly, under the RUPA, the partnership was dissolved when Arnold and Sylvester expressed their wish to wind up the partnership business.

The dissolution does not terminate the partnership. Rather, the partnership continues for the purpose of winding up the firm’s business, UPA § 30, RUPA § 802(a). However, dissolution impacts the ability of the partners to bind the partnership. The rules of the UPA and the RUPA vary somewhat on the details of this impact, but the result is the same.

Under RUPA § 804(1), a partner can bind the partnership after it has been dissolved to the extent that (a) “the transaction is appropriate for winding up the partnership business.” While some purchases, especially minor ones, may be completely appropriate for winding up a business, Jackie’s purchase of 20 new tables does not fall into this category. However, under RUPA § 804(2), a partner can also bind the partnership after it has been dissolved if the third party did not have notice of the dissolution and if, before the dissolution, the contract would have been binding on the partnership under RUPA § 301. According to RUPA § 102(b), a person has notice of a fact if he knows the fact, has received notification of the fact, or has reason to know the fact. In the case at hand, Tom did not even have reason to know the fact and therefore did not have notice. The only question therefore, is whether the transaction would have bound the partnership under RUPA § 301 RUPA before the dissolution. Before the dissolution, each partner had the authority to enter into contracts in the ordinary course of business and such contracts were binding on the partnership under RUPA § 301(1). For a restaurant, buying tables qualifies as a transaction in the ordinary course of business. It follows, then, that Jackie’s transaction would have bound the partnership before the dissolution and is therefore binding on the partnership under RUPA § 804(2).

If the case were governed by the UPA, the applicable rules would be slightly different. Under UPA § 35(1)(a), a partner can bind the partnership by “any act appropriate for winding up partnership affairs or completing transactions unfinished at dissolution.” As previously noted though, the purchase of the tables cannot be characterized as a transaction for winding up the partnership business, and it did not serve the completion of unfinished transactions either. Under UPA § 35(1)(b), the partner can also bind the partnership by any transaction that would have bound the partnership prior to the dissolution. As under the RUPA, the UPA requires that the third party did not have notice of the and also imposes some additional requirements: either a) the third party must have “extended credit to the partnership prior to [its] dissolution,” or b) the third party must both have “known of the partnership before [its] dissolution” and the dissolution must not have been “advertised in a newspaper of general circulation” in the place where “the partnership business was regularly carried on.” In the case at hand, these requirements were met: Tom has known the partnership since its formation, no newspaper mentioned the series of events that took place within the partnership, and Tom had no reason to know of the dissolution. Matters get a little more complicated though because the UPA imposes some additional limitations on the protection of third parties. First, the partnership is not bound by contracts concluded after the dissolution, if the partnership was dissolved because its business became illegal. Of course, that is not the case here. Rather, under the UPA, the partnership was dissolved because Bruce died. Second, subject to certain exceptions, the third party is not protected if the partner who concluded the contract became bankrupt, UPA § 35(3)(b). In the case at hand, that’s not a problem either since nothing in the facts suggests that Jackie has become bankrupt. Third, as a general rule, the contract fails to bind the partnership if the partner who concluded the contract did not have authority to wind up the partnership business. To determine whether Jackie had authority to wind up the partnership business, we have to look to UPA § 37. Under that provision, the default rule is that every partner who has not wrongfully dissolved the partnership and is not bankrupt has the right to wind up the partnership’s business. Accordingly, Jackie had the authority to wind up the firm’s affairs. In sum, even under the UPA, Jackie managed to bind the partnership.

Question 25

Dolly, Emmylou, Loretta, and Patsy own and operate a restaurant together. Each of them has contributed $10,000 to the restaurant. They have made an agreement regarding neither the duration of their enterprise nor the matter of how the restaurant’s profits will be distributed. However, they have agreed that the partnership shall not be dissolved by the dissociation of a partner as long as two or more partners remain. The restaurant has only once made a distribution to the partners, at which time each partner received $10,000.

On January 1, Dolly tells her fellow entrepreneurs that she has decided to take up a career as a country singer and that she has no more interest in running a restaurant. “In short,” she says, “I am out, effective immediately.” The next day, Dolly consults her lawyer to find out how much (if any) money she can expect in exchange for her partnership interest. Including all assets and liabilities, the restaurant has a going concern value of 1,000,000. Its liquidation value is $400,000. Assume that the state in which the restaurant is located has adopted the RUPA. Which of the following statements is most correct?

A
Dolly cannot expect to be paid anything because the agreement does not mention any right to payment on dissociation.

B
Dolly can only expect to be paid the value of her original contribution in the amount of $10,000.

C
Dolly can expect to be paid $100,000.

D
Dolly can expect to be paid $250,000.

Answer 25

D

This dissociation has not dissolved the partnership. Admittedly, because the partners have not specified a particular term or undertaking, the partnership is a partnership at will, and a partnership at will is normally dissolved when any partner notifies the partnership of his will to withdraw as a partner, RUPA § 801(1). However, under RUPA § 103, that rule is only a default rule. Accordingly, the partnership agreement could (and in this case did) provide that the dissociation did not dissolve the partnership. (Note, however, that the dissociation of a partner always dissolves the partnership when less than two partners remain after the dissociation because, under RUPA § 202(a), a partnership always requires at least two partners.)

Once a partner has dissociated without causing the partnership’s dissolution, the partnership has to purchase the dissociated partner’s partnership interest. Under RUPA § 701(b), the buyout price is “the amount that would have been distributable to the dissociating partner under RUPA 807(b) if, on the date of the dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date.” RUPA § 807(b) is tailored to a case in which the partnership has been dissolved and provides that, upon winding up the partnership business, the accounts must be settled, and each partner is entitled to distribution in an amount equal to any excess of the charges over the credits in the partner’s account.

What does Dolly’s account look like? The $10,000 that she has contributed are credited to Dolly’s account, RUPA § 401(a)(1). However, the $10,000 that were later distributed to Dolly have to be charged to her account, RUPA § 401(a)(2), meaning that the net balance of distributions and contributions is zero.

Also credited to the partner’s account are profits, whereas losses are charged, RUPA § 401(a). This includes profits and losses from the liquidation of the business in the winding-up phase. As a legal default, each partner is entitled to an equal share of the profits and losses, RUPA § 401(b). While the facts do not describe the losses and profits in detail, it does mention that, overall, the restaurant is worth $1,000,000 (going concern value) or $400,000 (liquidation value). Hence, after summing up the profits and losses, Dolly’s share in case of a sale of the restaurant would be $250,000 (going concern value) or $100,000 (liquidation value). Hence, if the partnership were dissolved and the restaurant sold, Dolly could expect a distribution in the amount of either $250,000 (going concern value) or $100,000 (liquidation value). Since RUPA § 701(b) declares the higher of these two prices to be decisive in calculating the buyout price, Dolly can expect a buyout price in the amount of $250,000.

Question 26

Hank, Conway, Buck, and Johnny own and operate a restaurant together. On January 1, Hank persuades his fellow entrepreneurs that the firm should obtain a loan of $100,000. The next day, Hank signs a loan agreement on behalf of the firm with Bank Corp., a local bank. According to the loan agreement, the firm gets a loan in the amount of $100,000, which it promises to pay back on July 1. On January 3, Buck tells Hank, Conway, and Johnny that he no longer enjoys running a restaurant and that he wants out, effective immediately. The others give him their blessing, and the firm purchases “Buck’s stake in the firm” for $100,000. Two days later, Buck takes a plane to Mexico where he plans to open a radio station.

In May, it becomes clear that the restaurant cannot repay the loan on time. Therefore, Hank calls Bank Corp. and points out that because Buck has left the firm and received cash in exchange for his stake in the firm, the restaurant is a little low on cash. After some back and forth, Hank and Bank Corp. agree that instead of paying back the $100,000 on July 1, the restaurant will pay back $110,000 on December 1. However, business gets worse over time, and by December 1, the restaurant has no assets left and cannot pay Bank Corp. Can Bank Corp. hold Buck liable with respect to some or all of the $110,000? Assume that the state where the restaurant is located has adopted the RUPA.

A
Buck is liable to Bank Corp. in the amount of $110,000.

B
Buck is liable to Bank Corp., but only in the amount of $100,000.

C
Buck is liable to Bank Corp., but only in the amount of $52,500.

D
Bank Corp. cannot hold Buck personally liable.

Answer 26

D

Correct. Note, first, that the firm is a partnership because Hank, Conway, Buck, and Johnny have formed an association of two or more persons to carry on a for-profit business as co-owners, RUPA § 202(a). Moreover, the loan constitutes a partnership liability. Hank acted with authority when he obtained the loan for the firm, and his actions bind the partnership, RUPA § 301. All partners are jointly and severally liable for debts of the partnership, RUPA § 306(1).

Furthermore, the fact that Buck dissociated from the partnership did not eliminate his liability as a partner, RUPA § 703(a). However, under RUPA § 703(d), a “partner is released from liability for a partnership obligation if a partnership creditor, with notice of the partner’s dissociation but without the partner’s consent, agrees to a material alteration in the nature or time of payment of a partnership obligation.” In the case at hand, Bank Corp. knew that Buck had left the partnership, and, without Buck’s consent, agreed to change the time of payment by one year. Therefore, Buck was released from his liability for the loan under RUPA § 703(d). Hence the bank cannot hold Buck liable at all. For many students, this provision is somewhat counterintuitive. They assume that the dissociated partner cannot be held liable for the alteration of the debt—in this case the additional $10,000—but still want to hold him liable for the original amount. However, the release under RUPA § 703(d) covers the original debt as well. This makes sense if you consider that if the debt had not been modified, it would have come due earlier and might already have been paid.

Question 27

Charlotte, Emily, Anne, and Branwell own and operate a vegetarian restaurant together. On January 1, Charlotte dissociates from the partnership. On January 4, the partnership files a statement of dissociation, which contains information about Charlotte’s dissociation. Elizabeth has long supplied tofu to the partnership’s restaurant and, based on her previous dealings with the partnership, believes that Charlotte is still a partner. Elizabeth does not know and has no reason to know that Charlotte has left the partnership. On January 6, Charlotte calls Elizabeth and, acting in the name of the partnership, buys 60 pounds of premium pressed tofu for a total price of $400. Charlotte takes the tofu with her and promises that Elizabeth will be paid the same week. Then Charlotte boards a ship to South America and is never seen again. It furthermore turns out that the partnership does not have any assets. Elizabeth now wants to hold Emily liable because she is the only one of the partners who has any assets. Assume that the state whose law is applicable has adopted the RUPA. Which of the following statements is most correct?

A
Emily is liable for the full $400, but only because Elizabeth did not know or have notice that Charlotte had left the partnership.

B
Emily is liable for the full $400, and the same would be true if Elizabeth had known about Charlotte’s dissociation when the contract was formed.

C
Emily is not liable with respect to the $400, but only because of the statement of dissociation.

D
Emily is not liable with respect to the $400, and this would have been true even if no statement of dissociation had been filed.

Answer 27

A

Correct. Note, first, that the firm is a partnership because Charlotte, Emily, Anne, and Branwell have formed an association of two or more persons to carry on as co-owners a business for profit, RUPA § 202(a). The big question is whether Charlotte created a partnership liability when she purchased the tofu from Elizabeth. For dissociated partners, the power to bind the partnership is governed by RUPA § 702. Under that provision, a dissociated partner retains the power to bind the partnership for two years after leaving the partnership, if certain conditions are met.

To begin, the dissociated partner can only bind the partnership if the relevant act would have bound the partnership prior to the dissociation. For a vegetarian restaurant, buying tofu is a standard transaction, and every partner has the authority to enter into contracts in the ordinary course of business. Therefore, if Charlotte had purchased the tofu before her dissociation, she would have been acting with authority, and the transaction would have bound the partnership, RUPA § 301.

Furthermore, for the dissociated partner to bind the partnership under RUPA § 702, the other party to the transaction must have reasonably believed that the dissociated partner was still a partner and must not have had notice of the dissociation. In the case at hand, Elizabeth reasonably thought that Charlotte was still a partner and had no reason to know of the dissociation. Note, in this context, that the mere fact that a statement of dissociation has been filed does not mean that third parties have notice of the dissociation.

Finally, the dissociated partner can only bind the partnership if the third party was not deemed to know of the dissociation under RUPA § 704(c). Under that provision, third parties are “deemed to have notice of the dissociation 90 days after the statement dissociation is filed.” In the case at hand, a statement of dissociation was filed, but at the time that the contract was concluded, 90 days had not yet passed. It follows, therefore, that Charlotte managed to bind the partnership and thereby create a partnership liability. Under RUPA § 306(1), all partners are jointly and severally liable for the relevant debt.

Question 28

Will, Jill, Hester, Chester, Peter, Polly, Tim, Tom, Mary, Larry, and Clarinda own and operate a restaurant together. On January 1, Will, Jill, Hester, Chester, Peter, Polly, Tim, Tom, Mary, and Larry discover that Clarinda has repeatedly stolen small sums of money from the restaurant, totaling about $1500 over two years. They therefore resolve, against Clarinda’s will, to expel her from the partnership with immediate effect. The partnership agreement is silent on the question of whether partners can be expelled. On January 2, Larry is involved in a car accident and suffers serious brain injuries. On January 10, a court appoints Will as Larry’s legal guardian. On January 12, Tom gets married. On January 14, Tim dies in a car accident. On January 16, Polly files for bankruptcy. On January 18, the remaining partners discover that Peter has secretly passed on the restaurant’s secret recipes to a competing restaurant in exchange for $10,000. Assume that the state in which the restaurant is located has adopted the RUPA. Which of the following statements is most correct?

A
The partnership was dissolved before January 20, but not before January 10.

B
The partnership was dissolved before January 10.

C
On January 20, the partnership still has not been dissolved, and the remaining partners include Will, Jill, Hester, Chester, Peter, Tom, Mary, and Clarinda, but no one else.

D
On January 20, the partnership still has not been dissolved, and the remaining partners include Will, Jill, Hester, Chester, Peter, Tom, and Mary, but no one else.

Answer 28

C

Correct. Note, first, that the firm is a partnership because Will, Jill, Hester, Chester, Peter, Polly, Tim, Tom, Mary, Larry, and Clarinda have formed an association of two or more persons to carry on as co-owners a business for profit, RUPA § 202(a). The decisive question is whether the events that occurred between January 1 and January 20 led to the dissolution of the partnership and/or to the dissociation of one or more partners.

The RUPA lists all dissolving events in RUPA § 801. However, none of the events listed there have occurred in the case at hand. Admittedly, under RUPA § 801(5), the partnership can be dissolved if “another partner has engaged in conduct relating to the partnership business, which makes it not reasonably practicable to carry on the business in partnership with that partner.” In the case at hand, both Clarinda, who stole from the partnership, and Peter, who sold the partnership’s secrets to a competitor, can be argued to have engaged in conduct that satisfies this condition. However, under RUPA § 801(5), the partnership’s dissolution does not occur automatically. Rather, it takes a judicial determination in order to dissolve the partnership. Since there was no such judicial determination, the partnership was not dissolved.

The remaining question concerns whether any of the partners were dissociated from the partnership. Dissociating events are listed in RUPA § 601. Needless to say, marrying is not a ground for dissociation, so Tom is still a partner.

Events that automatically cause the partnership’s dissolution, without any need for a formal judicial determination, include the death of a partner (RUPA § 601(7)(i)), the appointment of a guardian (RUPA § 601(7)(ii)), and the partner’s becoming a debtor in bankruptcy (RUPA § 607(6)(i)). Hence, Larry, Tim, and Polly were dissociated from the partnership. Furthermore, a partner is automatically dissociated from the partnership in case of “the partner’s expulsion pursuant to the partnership agreement,” RUPA § 601(3). The other partners tried to expel Clarinda, but this attempt at expelling her did not have any basis in the partnership agreement and therefore did not lead to her dissociation.

Under RUPA § 605(i), a partner can be expelled because he has engaged in “wrongful conduct that [has] adversely and materially affected the partnership business,” and under RUPA § 605(ii) the same is true if the partner has “willfully and persistently” breached his duty of loyalty to the other partners in a material way. In the case at hand, both Clarinda’s repeated theft and Peter’s sale of the partnership’s secret can be argued to satisfy these requirements. However, RUPA § 601(b) requires a judicial determination on application by a partner, and, in the case at hand, no such judicial determination has taken place. Hence, despite their misdeeds, Clarinda and Peter are still part of the partnership.

In sum, the only partners who were dissociated are Larry, Tim, and Polly. That leaves Will, Jill, Hester, Chester, Peter, Tom, Mary, and Clarinda

Question 29

Chandler and Joey own and operate a bicycle store together. According to their written “business agreement,” each of them is entitled to 50% of the profits. The agreement does not mention losses. On January 1, Chandler causes a traffic accident while driving to a supplier to pick up some new bikes. In causing the accident, Chandler acted with simple negligence. As a result of the accident, Ross, a pedestrian, is injured and subsequently incurs medical costs in the amount of $1000. Because the partnership does not currently have any money in its account, Chandler pays the $1000 dollar by check from his personal account. Can he demand to be reimbursed by the firm?

A
Chandler has no right to be reimbursed because the agreement between Joey and Chandler does not mention any claim to reimbursement.

B
Chandler has no right to be reimbursed because the accident was due to his own negligence.

C
Chandler has no right to be reimbursed because the partnership was never liable to Ross in the first place.

D
Yes, Chandler has the right to be reimbursed by the firm.

Answer 29

D
According to UPA § 18(b), RUPA § 401(c), the partnership has to reimburse partners for payments made in the ordinary course of the partnership business. Note that paying partnership liabilities is part of the ordinary course of business, such that Chandler has a right to be reimbursed if he discharged a partnership liability by paying Ross. A partnership is liable for any wrongful act that a partner has committed either with authority or in the ordinary course of business of the partnership, UPA § 13, RUPA § 305. Here, Chandler caused the accident when he was driving to a supplier to pick up bikes, and so he committed the tort (negligence) in the ordinary course of business. Accordingly, Ross’s tort claim was a partnership liability, so that paying that liability created a right to reimbursement.

But what about the fact that Chandler acted negligently? Under RUPA § 404(a), the partners owe the partnership and each other a duty of care. The older UPA does not explicitly mention such a duty, but there is nonetheless wide agreement that partners owe the partnership a duty of care. Could one argue that Chandler violated that duty and therefore owed the partnership damages—a claim that the partnership could offset against Chandler’s claim for reimbursement? The answer is no. While the partners owe the partnership a duty of care, that duty “is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law,” RUPA § 404(c). The same is true under the UPA. Because Chandler only acted with simple negligence, he did not breach his duty of care. Hence, he can demand to be reimbursed by the partnership.

Question 30

On January 1, Lisa, Mary, and Nora all sign a written agreement, according to which they will open a bookstore together. According to the agreement, each of them shall receive one-third of the profits. The agreement also provides that each of them shall make a contribution in the amount of $150.

On January 2, Lisa, Mary, and Nora each pay the promised $150.

On January 15, the bookstore opens its doors to the public.

On January 17, Lisa is putting books onto shelves in the bookstore. Acting with simple negligence, she bumps into an elderly customer, Mark. This causes Mark to fall and hurt his leg. As a result, the customer, Mark, has to receive medical treatment for $100.

On January 18, Lisa, Mary, and Nora enter into a written agreement with Alma, according to which Alma joins the firm in exchange for making a contribution in the amount of $150. Alma pays the $150 the same day. The agreement with Alma also provides that, henceforth, each of the four (Lisa, Mary, Nora, and Alma) shall receive one-quarter of the profits.

On January 20, Mark goes to the store and demands $100 to cover the medical expenses he has incurred as a result of hurting his leg. Regarding the $100 demanded by Mark, which, if any, of the following statements is true?

A
Lisa, Mary, Nora, and Alma are jointly and severally liable. The partnership itself is not liable because it is not a legal entity distinct from the partners.

B
The partnership is liable to Mark. Furthermore, Lisa, Mary, Nora, and Alma are jointly and severally liable for the partnership’s obligation to Mark.

C
Lisa, Mary, and Nora are jointly and severally liable. The partnership itself is not liable because it is not a legal entity distinct from the partners. Alma is not personally liable to Mark.

D
The partnership is liable to Mark. Furthermore, Lisa, Mary, and Nora are jointly and severally liable for the partnership’s obligation to Mark. Alma is not personally liable to Mark.

Answer 30

D

Let us start with the question of whether the partnership is liable. Note, first, that Lisa, Mary, and Nora formed a partnership when they started the bookstore because they formed an association of two or more persons to carry on as co-owners a business for profit, UPA § 6, RUPA § 202(a). Under UPA § 13, RUPA § 305(a), the partnership is liable for loss or injury caused to a person as a result of a wrongful act or omission of a partner acting in the ordinary course of business of the partnership or with authority of the partnership. Lisa committed a tort (“negligence”) when she negligently bumped into Mark and caused him to fall. This tort constitutes a wrongful act, and Lisa was acting in the ordinary course of business of the partnership. Hence, the partnership is liable to Mark. At this point, a note on the terminology is in order. Under the Revised Uniform Partnership Act, the partnership is a legal entity distinct from its partners, RUPA § 201, and can therefore be liable. Under the old UPA, the partnership is nothing else but the partners as a group. However, even under the old UPA, we say that the partnership is liable, cf. § 13 UPA.

Lisa, Mary, and Nora are jointly and severally liable for the $100. This is because under UPA § 15(a), RUPA § 306(a), all partners are jointly and severally liable for the partnership’s tort liabilities.

But how about Alma? Under UPA § 17, RUPA § 306, a partner is not personally liable for partnership obligations that arose before the partner joined the partnership. In other words, new partners are not liable for old debts. Alma joined the partnership on January 18, and hence after the partnership had incurred the obligation to Mark (which happened on January 17). Therefore, Alma is not liable to Mark.

Question 31

On January 1, Richard, Clive, and Owen open a bookstore together. According to a written agreement, which they all sign the same day, each of them gets one-third of the profits. Furthermore, the agreement specifies that the “business shall continue until December 31 and shall then dissolve automatically.” On January 3, Richard dies in a car accident. He has no heirs. On January 5, Clive dies of a heart attack. His only heir is his wife Mary. On January 7, Mary meets Owen, and they both agree to “carry on the business together as co-owners.” Assume that the applicable state law on partnerships is identical to the RUPA. Which of the following statements is correct?

A
On January 1, Richard, Clive, and Owen formed a partnership. That partnership was dissolved on January 3, when Richard died.

B
On January 1, Richard, Clive, and Owen formed a partnership. That partnership was dissolved on January 5, when Clive died.

C
On January 1, Richard, Clive, and Owen formed a partnership. That partnership was not dissolved by Richard’s death, and it was not dissolved by Clive’s death either. However, it was dissolved and replaced by a new partnership on January 7, when Mary and Owen decided to carry on the business as co-owners.

D
On January 1, Richard, Clive, and Owen formed a partnership. That partnership was not dissolved by Richard’s death, and it was not dissolved by Clive’s death either. Nor was it dissolved on January 7, 2013. However, it will be dissolved automatically on December 31.

Answer 31

B

Correct. Note, first, that on January 1, Richard, Clive, and Owen formed a partnership because they created an association of two or more persons to carry on a business as co-owners for profit (cf. RUPA § 202(a)).

Under the RUPA, the death of a partner does not dissolve the partnership if at least two other partners remain; rather, the partner’s death will only cause that partner’s dissociation from the partnership under RUPA § 601(7)(i). Under the old UPA (1914), the death of any partner will dissolve the partnership under UPA § 31(4). Given that this partnership was governed by the RUPA, Richard’s death did not dissolve it.

What about Clive’s death. As noted above, a partner’s death does not generally dissolve a partnership under the RUPA. However, in this particular case, there is an additional factor to consider: as a result of Clive’s death, only one of the partners remains. This is crucial because by definition, a partnership requires two or more persons (cf. UPA § 6(1), RUPA § 202(a)). Therefore, even though RUPA § 801 does not mention the death of a partner as a ground for dissolution, those courts that have addressed the issue have generally held that the death of one partner in a two-person partnership leads to the partnership’s dissolution. Therefore, the partnership was dissolved on the day that Clive died, i.e., on January 5.

Question 32

Pam and Joe are co-owners of a small soccer equipment store (“Soccer-Land”) that they operate together in Los Angeles. According to an oral agreement, Pam has authority to purchase all kinds of goods for the firm, not just those goods that are normally sold in a soccer equipment store. Moreover, on January 1, 2000, a statement of partnership authority is filed, according to which Pam has authority to purchase all kinds of goods for the firm, not just those goods that are normally sold in a soccer equipment store. On February 2, 2000, Joe and Pam agree that henceforth, Pam shall only have authority to purchase soccer balls for the firm.

On January 3, Pam, acting in the name of “Soccer-Land,” calls Robert, an antiquities dealer. Robert happens to know Soccer-Land because his children purchase all their soccer equipment there. Pam, acting in the name of “Soccer-Land” purchases a collection of antique violins at a price of $1,500,000 from Robert. Robert delivers the violins immediately but is not paid. Pamela bought the violins because she thought they were a “splendid deal.” Joe knew nothing of the purchase.

At the time of the purchase, Robert does not know about—and has not received notification of—the statement of partnership authority. Nor is he aware (or has any reason to be aware) of the February 2 agreement, according to which Pam shall only have authority to purchase soccer balls for the firm, and he (Robert) has not received any notification of that agreement either. Assume that the case is governed by the RUPA.

Is Joe personally liable with respect to the $1,500,000?

A
Yes, but only because Robert could rely on the statement of partnership authority.

B
Yes, and the same would be true if no statement of partnership authority had been filed.

C
No, because a statement of partnership authority can never be invoked to the disadvantage of the partnership except in certain cases involving real estate.

D
No, because the purchase was not for apparently carrying on in the ordinary course the firm’s business.

Answer 32

D
Note, first, that Pamela and Joe were partners because they had formed an association of two or more persons to carry on a business as co-owners for profit (cf. RUPA § 202(a)). According to RUPA § 306, all partners are jointly and severally liable for the debts of a partnership. The question, though, is whether Pamela’s purchase of the violins has created a partnership debt. For a partner to bind the partnership to a contract, two conditions must generally be satisfied. First, the partner must have acted on behalf of the partnership. Since Pamela explicitly acted in the name of the store, this requirement is met. Second, the partner must have had the power to bind the partnership.

To determine whether a partner has the power to bind the partnership, one has to distinguish. If the partner acts with authority, then the acting partner always has the power to bind the partnership (cf. RUPA § 301; UPA § 9). However, note that the term “with authority” has a special meaning in partnership law: One must look at the internal division of power between the partners. If internally (i.e., as between the partners) the partner was allowed to act for the partnership, then she acted with authority and therefore, externally, she had the power to bind the partnership.

So how does one know whether the partner was allowed to act according to the internal division of power? That question is answered by RUPA § 401(j) (or UPA § 18(h)), and the relevant rules can be summarized as follows:

First, one has to look to the partnership agreement. The partnership agreement can only be amended with the consent of all the partners, so if the partnership agreement stipulates what the partners may or may not do, the relevant provision is binding unless all of the partners agree otherwise.

If the partnership agreement is silent, then the following rules apply: Any act outside the ordinary course of business can only be undertaken if all the partners consent. This rule is expressly contained in RUPA § 401(j), but it also applies under the UPA (1914). With respect to acts within the ordinary course of business of the partnership, one has to distinguish. In principle, any partner is allowed to undertake them. However, one important restriction applies: Any difference of opinion between the partners can be decided by a majority of the partners (UPA § 18(h) and RUPA § 401(j).) This decision is then binding even on the partner who did not consent.

In the case at hand, Pamela and Joe had come to an agreement that Pamela could only purchase soccer balls for the store. As a general rule, a partnership agreement does not have to be in writing. Rather, oral agreements between the partners are binding as well. Of course, partnership agreements remain subject to the general Statute of Frauds. Hence, an oral partnership agreement is unenforceable if it is for a term of more than one year. However, a so-called at-will partnership—that is, a partnership that has been entered into for an indefinite time and can be terminated at any time by any partner—is generally thought to be capable of being performed within one year and therefore does not fall within the one-year rule of the Statute of Frauds. In the case at hand, the Statute of Frauds does not apply, and the partners’ agreement regarding the extent of Pamela’s authority is binding. Accordingly, Pamela did not have authority to purchase the violins.

However, Pamela’s lack of authority does not necessarily imply that she lacked the power to bind the partnership. Rather, if the acting partner lacked authority for the transaction that he has undertaken, one has to distinguish between those acts that appear to be for the carrying on of the partnership business in the usual way and those acts that do not fall into this category.

If the act does not appear to be for the carrying on of the partnership business in the usual way, then the partnership will not be bound by a partner acting without authority (RUPA § 301(2)). By contrast, If the act appears to be for the carrying on of the partnership business in the usual way, then the general principle is that the partnership will be bound by the act, even though the acting partner acted without authority (RUPA § 301(1)). However, the partnership is not bound if the third party knew or had received notification that the partner lacked authority (RUPA § 301(1)). In the case at hand, the partnership’s business was a soccer equipment store, and so purchasing violins was not in the ordinary course of the partnership’s business.

Even so, our analysis is not quite finished. That is because the RUPA introduces an additional layer of protection for third parties in the form of the rules governing the statement of partnership authority. As a general matter, a grant of authority contained in such a statement is conclusive in favor of the third party, RUPA § 303(d)(1). However, this protection is subject to various restrictions. In particular, the statement can be canceled, and, even if it has not been canceled by the partnership, it is canceled automatically five years after the most recent amendment, RUPA § 303(g). In the case at hand, the statement of partnership authority was filed in the year 2000, and there is no indication that it has been amended since. Accordingly, it was canceled in 2005 and thus could not protect Robert when he sold the violins in 2020. It follows that the sale of the violins did not create a partnership liability. Therefore, Joe is not personally liable with respect to the $1,500,000.

Question 33

On January 1, Carla, Maria, and Zachary sign a written “partnership agreement,” according to which they shall “own and operate” a shoe store together. According to the agreement, each of them will receive one-third of the firm’s profits. The agreement also provides: “This partnership shall last until at least December 31.”

On March 15, Carla tells Maria and Zachary that her (Carla’s) sister Melanie wants to join the partnership. Zachary is in favor, but Maria is opposed. Against Maria’s declared opposition, the three others—Carla, Zachary and Melanie—sign an agreement, according to which Melanie “becomes a partner in the partnership between Carla, Maria, and Zachary.”

On March 16, Melanie calls Jeff, who is one of the shoe store’s suppliers. She tells Jeff: “Hi, I am the fourth partner in the partnership that runs the shoe store—together with Zachary, Maria, and Carla, you know.” Then, professing to act in the name of the partnership, she orders 10 pairs of tennis shoes at a total price of $1,000. The shoes are delivered the same day. At the time that Melanie ordered the tennis shoes, both she and Jeff knew that Maria, Carla, and Zachary were firmly opposed to any such purchase.

On June 1, Zachary dies in a car accident. Prior to Zachary’s death, the partnership had frequently purchased hiking boots from Mark. On June 2, Maria tells Carla that she (Maria) does not want Carla to purchase any more hiking boots for the partnership. Carla tells Maria that she (Carla) disagrees and that she thinks the partnership should continue to purchase and sell hiking boots. Melanie, who happens to be present in the same room, joins the discussion and states that she, too, is in favor of purchasing more hiking boots.

On June 3, Maria calls Mark and tells him: “As you know, Zachary has died, and I have told Carla that I don’t want our partnership to buy any more hiking boots, and so she has no authority to buy any more hiking boots. If Carla orders more hiking boots, I will not be liable, and the firm won’t be liable either.” However, Mark replies: “Look, I believe you that Carla is not supposed to buy any more hiking boots. But, quite frankly, your arrangements are none of my business. If Carla orders hiking boots for the firm, then I will deliver them, and I don’t see why I should not be able to hold you and the firm liable.” On June 4, Carla—acting in the name of the partnership—orders twenty pairs of hiking boots from Mark at a total price of $1,000. The boots are delivered the same day.

Assume that the case is governed by the RUPA and that the judge hearing the case believes that in interpreting the RUPA, courts should, first and foremost, focus on the plain meaning of the RUPA’s provisions. Maria wants to know whether she is liable to Jeff and/or Mark. Which of the following statements is correct?

A
Maria is liable to Jeff in the amount of $1,000, and she is liable to Mark in the amount of $1,000.

B
Maria is liable to Jeff in the amount of $1,000. By contrast, she is not liable to Mark.

C
Maria is liable to Mark in the amount of $1,000. By contrast, she is not liable to Jeff.

D
Maria is neither liable to Mark nor to Jeff.

Answer 33

C

Question 34

Horizon Corp. is a Delaware corporation. It has two shareholders, namely Ernest and Bert. Each of them holds one share, and each of them is a director of the corporation. The corporation does not have any other directors. In former times, Ernest and Bert were good friends. Now, however, they fight all the time. They cannot agree on anything, and the corporation has not adopted any board resolutions for over a year. Which, if any, of the following statements is correct?

A
If either Bert or Ernie requests the dissolution of the corporation, the Delaware Chancery Court may dissolve the corporation.

B
The Delaware Chancery Court cannot dissolve the corporation.

C
The Delaware Chancery Court can dissolve the corporation, but only if both Ernie and Bert request such a dissolution.

D
None of the statements above is correct.

Answer 34

A

The dissolution of the corporation in case of deadlock is governed by DGCL § 273. Under that provision, the Delaware Chancery Court can dissolve a corporation with two shareholders, each of whom owns 50%, if one of the shareholders petitions for the corporation’s dissolution and if the shareholders are “unable to agree upon the desirability of discontinuing such joint venture and disposing of the assets used in such venture.” These conditions are met in the case at hand.

Question 35

Rebel Corp. is a Delaware corporation. It owns and operates an advertising agency. The corporation has four shareholders named Alexandra, Bella, Carl, and Dave. Rudy is the sole director of Rebel Corp. On January 5, after carefully investigating and analyzing all relevant facts, the board resolves to lease a new office for the corporation. The lease is twice as expensive as that for the old office, but the new office is much more centrally located and looks much more “upscale,” which, in Rudy’s opinion, will make it much easier to attract new customers. The shareholders are furious. All of them are opposed to the board’s decision. However, the next day, Rudy proceeds as planned and leases the new building while canceling the lease for the old office. Which of the following statements is correct?

A
Rudy has neither violated his duty of loyalty nor his duty of care.

B
Rudy has violated his duty of care but not his duty of loyalty.

C
Rudy has violated his duty of loyalty but not his duty of care.

D
Rudy has violated both his duty of loyalty and his duty of care.

Answer 35

A

Under Delaware law, the duty of loyalty requires the directors to act in the best interest of the corporation. However, this does not mean that the directors have to bow to the wishes of the shareholders. Rather, as the Court of Chancery explained in Am. Intl. Rent a Car, Inc v. Cross, 7583, 1984 WL 8204, at *3 (Del. Ch. May 9, 1984), it is not “a per se breach of fiduciary duty for the Board to act in a manner which it may believe is contrary to the wishes of a majority of the company’s stockholders.” Rather, the directors must act according to what they believe is in the best interest of the corporation, even if the shareholders disagree. Since Rudy believed the move to the new office to be in the corporation’s best interest, he has not breached his duty of loyalty.

Moreover, Rudy has not breached his duty of care either. A violation of the duty of care occurs where a director acts without being reasonably informed. The burden of proof is on the plaintiff. In the case at hand, Rudy made his decision only after carefully investigating and analyzing all relevant facts. (The facts mention that “the board” investigated and analyzed all relevant facts, but the corporation only has a single director, namely Rudy.) Accordingly, Rudy did not violate his duty of care.

Question 36

Which of the following provisions cannot be included in the certificate of incorporation of a Delaware corporation without violating Delaware law?

A
A provision limiting the duration of the corporation’s existence to a specified date.

B
A provision imposing personal liability for the debts of the corporation on its stockholders.

C
A provision eliminating or limiting the liability of a director to the corporation or its stockholders for monetary damages for breach of the duty of loyalty.

D
A provision requiring for certain corporate actions the vote of a supermajority of 90% of all shares entitled to vote on the matter.

Answer 36

C

Correct. DGCL § 102(b)(7) allows provisions eliminating the liability of corporate directors for fiduciary duty violations. However, “such provision shall not eliminate or limit the liability of a director . . . [f]or any breach of the director’s duty of loyalty to the corporation or its stockholders.” Accordingly, any provision seeking to limit or eliminate the liability of a director to the corporation or its stockholders for monetary damages for breach of the duty of loyalty violates Delaware law.

Question 37

Hypo Corp. owns $1,100,000 in cash and no other assets. It has liabilities in the amount of $100,000. Hypo Corp. has not made a profit for five years. It has ten shares outstanding. The corporation’s legal capital equals $1,000,000. The board of Hypo Corp. wants Hypo Corp. to pay a dividend in the amount of $10,000 per share. Would this be legal?

A
Yes, Hypo Corp. can pay the dividend out of its surplus.

B
Yes, but only because of the nimble dividends rule.

C
Yes, despite the fact that the corporation does not have a surplus and despite the fact that the nimble dividends rule does not apply.

D
No, the payment of the dividend would not be legal.

Answer 37

D

Correct. Under DGCL § 174 of the Delaware General Corporation Law, a corporation may pay dividends either out of its surplus—this is the so-called surplus rule—or, in case there is no surplus, out of “its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year”—this is known as the nimble dividends rule.

According to DGCL § 154 of the Delaware General Corporation Law, the surplus equals the “excess, if any, at any given time, of the net assets of the corporation over the amount so determined to be capital shall be surplus.” Furthermore, the net assets refer to “the amount by which total assets exceed total liabilities.” In the case at hand, the net assets equal $1,000,000 and so does the legal capital, so that the corporation does not have any surplus. Accordingly, the desired dividend cannot be paid out of the surplus.

Under the nimble dividends rule, a corporation that has no surplus may pay a dividend out of “its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.” However, in the case at hand, the corporation has not made a profit for the last five years, and therefore cannot invoke the nimble dividends rule either. It follows that it would be illegal for the corporation to pay a dividend at this time.

Question 38

When is a court most likely to disregard
the separate identity of a subsidiary corpo-
ration and allow recovery from the parent
corporation?
(A) When the parent corporation has
greater resources than the subsidiary
corporation.
(B) When the parent corporation essen-
tially controls the decisionmaking of
the subsidiary corporation by electing
its board of directors.
(C) When the parent corporation owns
100% of the stock of the subsidiary
corporation.
(D) When the parent corporation has
inadequately capitalized the subsidiary
without a reasonable expectation that
the subsidiary will achieve financial
independence.

Answer 38

D

Question 39

Which of the following people would not
be held liable for insider trading under rule
10b-5?
(A) The president of a corporation who
knows that the corporation is about to
announce the launch of a groundbreak-
ing new product and buys company
stock in anticipation of the product’s
success.
(B) An accountant who, while acting as
an independent contractor, discovers
a major financial error in the corpo-
ration’s books, and then sells all of
his stock in the corporation before
revealing the error.
(C) A director who advises his niece to
sell all of her stock in the corporation
because he has received word that the
corporation is about to be named the
defendant in a class action lawsuit.
(D) A bartender who sells all of her stock
in the corporation after she overhears
two of the corporation’s directors
discussing the company’s recent finan-
cial difficulties over drinks.

Answer 39

D

Question 40

Which of the following is not a require-
ment to satisfy a director’s duty of care?
(A) The director must act in good faith.
(B) The director must act with the care
that a person in a like position would
exercise under similar circumstances.
(C) The director must act in a manner the
director reasonably believes to be in the
best interests of the corporation.
(D) The director must act in reliance on
her own business judgment and not in
reliance on the opinions of others.

Answer 40

D

Question 41

Which of the following is not a neces-
sary element for a successful cause of
action under section 16(b) of the Securities
Exchange Act?
(A) An officer, director, or more than 10%
shareholder of a corporation made a
profit.
(B) The profit was made on the purchase or
sale of an equity security.
(C) The profit was made by use of insider
information.
(D) The purchase and sale or sale and
purchase was within a six-month
period.

Answer 41

C

Question 42

Which of these choices outlines the proper
steps for adopting a fundamental corporate
change?
(A) The board adopts a resolution recom-
mending the change; a notice describ-
ing the proposed change is sent to the
shareholders; after allowing time for
shareholder comments, the change is
approved by the board; the change is
formalized in articles that are filed with
the state.
(B) The board adopts a resolution
recommending the change; a notice
describing the proposed change is
sent to the shareholders; the change
is approved by the shareholders; the
change is formalized in articles that are
filed with the state.
(C) A formal notice describing the
proposed change is filed with the state;
notice is sent to the shareholders; the
change is approved by the shareholders;
the change is formalized in articles that
are filed with the state.
(D) A formal notice describing the
proposed change is filed with the state;
notice is sent to the shareholders;
after allowing time for shareholder
comments, the change is approved by
the board; the change is formalized in
articles that are filed with the state.

Answer 42

B

Question 43

Which of the following statements is true
regarding a promoter’s personal liability on a
preincorporation contract?
(A) A promoter is personally liable even
if the contract expressly states that the
promoter is not to be bound.
(B) A promoter remains liable even if the
corporation is formed and adopts the
contract.
(C) A promoter is acting as an agent for
the unformed corporation and is not
personally liable.
(D) The corporation, not the promoter, is
the intended beneficiary to the contract
so the promoter is not personally liable.

Answer 43

B

Question 44

Which of the following statements is true
if a share has a $5 noncumulative preference?
(A) The share is entitled to a $5 annual
payment.
(B) The share is entitled to a $5 payment
before a distribution can be made on
account of common shares.
(C) The share is entitled to a $5 payment
plus the distribution paid on account of
a common share whenever a distribu-
tion is made on account of common
shares.
(D) The share is entitled to a $5 payment
each quarter and any missed prefer-
ence payments must be paid before a
distribution can be made on account of
common shares.

Answer 44

B

Question 45

A 3% shareholder of a corporation
purchases an additional 11% of the compa-
ny’s stock. Two months later, he sells all his
stock to fund his retirement overseas. Is the
shareholder liable under section 16(b) of
the Securities Exchange Act of 1934 for the
profits he made on the sale?
(A) Yes, as a holder of more than 10% of
the corporation’s stock he is strictly
liable for any profits made within a six
month period.
(B) Yes, because he sold more than 10% of
the company’s stock within two months
of purchasing it.
(C) No, section 16(b) would not be
triggered because he was not a 10%
shareholder at the time he purchased
the additional 11% of the stock.
(D) No, because he sold his stock to fund
his retirement, not on the basis of any
insider information.

Answer 45

C

Question 46

In which of these situations is a court least
likely to pierce the corporate veil?
(A) When corporate formalities are ignored
and injustice results.
(B) When the corporation was inadequately
capitalized at the outset.
(C) When the corporation becomes insol-
vent due to poor management.
(D) When necessary to prevent fraud on
creditors.

Answer 46

C

Question 47

Which of the following statements
regarding shareholder lawsuits is most
accurate?
(A) All shareholder suits against their
corporation are known as derivative
actions because they all derive from
the shareholder’s relationship to the
corporation.
(B) Since shareholders are technically the
owners of a corporation, they cannot
bring any lawsuit against the corpora-
tion because to do so would be the
equivalent of suing themselves.
(C) Shareholders can bring direct actions
against their corporation to enforce
their own rights and any recovery will
be for their own benefit; shareholders
can sometimes bring derivative actions
to enforce the rights of the corporation,
but in those cases recovery generally
goes to the corporation and the share-
holders bringing the action can only
recover their reasonable expenses.
(D) Shareholders have the right to bring
lawsuits against their corporation at any
time, but their fiduciary duty to their
fellow shareholders requires that any
recovery be shared by all the share-
holders in proportion to the amount of
shares held.

Answer 47

C

Question 48

For a private plaintiff to recover damages
under rule 10b-5, the plaintiff must show all
of the following except:
(A) The defendant engaged in fraudulent
conduct.
(B) The defendant purchased or sold
securities.
(C) The defendant’s conduct involved
the use of some means of interstate
commerce.
(D) The defendant’s actions caused the
plaintiff damages.

Answer 48

B

Question 49

When is a corporation liable for a
pre-incorporation contract that a promoter
signed on behalf of the corporation?
(A) Never, a corporation cannot be held
liable on a contract that was formed
before its existence.
(B) As soon as the corporation is formed,
because a promoter serves as the agent
of a corporation prior to its existence.
(C) When the corporation expressly or
impliedly adopts the contract as its
own.
(D) Only when there is a novation formally
releasing the promoter of liability and
substituting the corporation.

Answer 49

C

Question 50

Which of the following statements
regarding the president of a corporation is
true?
(A) The president of a corporation only has
the authority that is expressly granted
in the corporation’s articles of incorpo-
ration.
(B) The president of a corporation has
implied authority to enter into contracts
on behalf of the corporation in the
ordinary course of corporate affairs.
(C) The president of a corporation has
no authority to bind the corporation
without the express approval of the
corporation’s board of directors.
(D) The president of a corporation has
absolute authority to run the corpora-
tion in any reasonable manner she sees
fit under the business judgment rule.

Answer 50

B

Question 51

Which of these alone is not an adequate
reason for upholding a transaction in which a
director has a conflicting personal interest?
(A) The transaction, judged according to
circumstances at the time of the com-
mitment, was fair to the corporation.
(B) The transaction will result in any
tangible or intangible benefit to the
corporation.
(C) The transaction was approved by a
majority of the votes entitled to be cast
by shareholders without a conflicting
interest in the transaction after all
material facts have been disclosed to
the shareholders.
(D) The transaction was approved by a
majority of the directors (but at least
two) without a conflicting interest after
all material facts have been disclosed
to the board.

Answer 51

B