LS 576 - Business Law II

Dr. Bennett-Alexander

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Chapter 26 Introduction to Negotiable Instruments and Documents of Title

Chapter 27 Negotiable Instruments: Negotiability

Chapter 28 Transfer, Negotiation, & Holder in Due Course

Chapter 29 Negotiable Instruments: Liability Defenses & Discharge

Chapter 30 - Negotiable Instruments: Checks

Chapter 31 - Electronic Fund Transfers

Chapter 32 - Secured Transactions

Chapter 33 - Rights of Debtors & Creditors

Chapter 35 - The Agency Relationship

Chapter 36 - The Effect of Agency Relations

Chapter 37 - Forms of Business Organizations

Chapter 38 - Nature & Formation of Partnerships

Chapter 39 - Operation & Dissolution of Partnerships

Chapter 40 - Limited Partnerships

Chapter 41 - Introduction to Corporations

Chapter 42 - Forming the Corporation

Chapter 43 - Financing the Corporation

Chapter 44 - Managing the Corporation

Chapter 45 - Corporate Mergers, Dissolutions & Termination

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 26 Introduction to Negotiable Instruments and Documents of Title

ANSWERS TO DISCUSSION QUESTIONS

1. In transnational sales, a seller may not be willing to extend credit to the buyer. In order to receive the goods, the buyer may arrange for a letter of credit from a bank, whereby the bank is presented appropriate documents. The agreement makes the bank, rather than the buyer, the party obligated to pay. By using a letter of credit, the buyer may obtain goods from the seller because the seller is assured of payment from the buyer's bank.

2. There are a number of advantages associated with a negotiable instrument as opposed to a simple contract to receive money. A person in possession of a negotiable instrument may actually be in a better legal position than the person from whom he or she took the instrument. On the other hand, an assignee of a simple contractual right to receive money is never in any better position than his or her assignor. The courts often state that the assignee "steps into the shoes" of the assignor. By this, the courts mean that the assignee is in the same position with respect to enforcing the contract as was the assignor. That is not the case when a person takes a qualifies as a holder in due course. The holder in due course takes the instrument subject only to real defenses.

3. a. A consumer wants to purchase an automobile and goes to a bank for a loan. The bank will ask the consumer to sign a promissory note which obligates the consumer to repay the money to the bank over a period of time or on a fixed maturity date.

b. A signed promissory note serves as written evidence of a consumer's obligation to a bank.

c. When a person goes into a store to purchase an item, that person might pay for it by presenting a check to the store.

d. If a seller wanted to sell goods to a buyer in another part of the country, the seller could insist that the buyer send a certified check before it ships the goods.

ANSWERS TO REVIEW PROBLEMS

1. This is a time note. It is a note because there is an unconditional promise to pay a certain sum in money. There are two parties to a note, the payee (John Frank) and the maker (Peter Graves). Because this instrument is payable at a future date, as opposed to on demand, it is a time rather than a demand instrument.

2. This instrument is a demand draft. It contains an order to a person, requiring that person to pay a certain sum in money to a specific person. There are three parties to a draft: the payee (Alice Smith), the drawer (Jack Jones), and the drawee (Bill Ford). Because it is payable immediately, it is a demand instrument. No one is liable on this instrument in its current form. Bill Ford, the drawee, is not obligated to pay anything until he agrees to pay the draft by signing his name across the face of the instrument. If Ford agrees to pay the draft, he becomes an acceptor.

3. A bill of lading is a contract between the carrier and the shipper of goods which covers the terms and conditions of the arrangement between them. It is essentially a contract issued by the carrier to transport goods.

4. Because a consumer good is involved, Anderson would not quality as a holder in due course.

5. Yes. As an accommodation party, Case is liable as a co-maker.

ANSWER TO CASE PROBLEM

1. Yes. Allied is a holder-in-due course and takes the promissory free of the defenses which would be raised by the Burchetts. Burchett v. Allied Concord Financial Corp., 396 P. 2d 186 (1964).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 27 Negotiable Instruments: Negotiability

ANSWERS TO DISCUSSION QUESTIONS

1. The UCC requires that the document be (1) a signed (2) writing (3) containing a promise or order to pay (4) that is unconditional (5) relating to a fixed amount (6) money. Further, it must (7) contain no other undertaking or instruction, (8) be payable on demand or at a certain time, and (9) be payable to order or to bearer (or words of similar meaning).

2. Three phases that would make an instrument bearer paper are:

pay to bearer;

pay to cash, and

pay to the order of John Doe or bearer.

ANSWERS TO REVIEW PROBLEMS

1. No. For an instrument to be negotiable it must contain an unconditional promise or order to pay. Ross has acknowledged his obligation to pay Mary $300, but he has not promised to pay it or ordered someone else to pay it. Therefore, this instrument is not negotiable.

2. The negotiability of an instrument must be determinable by an examination of the face of the instrument itself. It must not be necessary for anyone who wishes to take the instrument to refer to any other document in order to determine if the instrument is negotiable. The first provision does not render the note nonnegotiable because it only explains why the instrument was issued. In the case of the second provision, however, a person who wishes to take this instrument would have to examine the contract to determine its provisions. This provision renders the instrument nonnegotiable.

3. Yes. A note need not be payable in dollars. It may be payable in foreign currency such as British pounds. This note is also payable at a definite time, "six months after sight." Although the time for payment is subject to acceleration in the event Erwin dies, such a provision will not render the instrument nonnegotiable because it is payable at a definite time subject to acceleration.

4. No. In order for an instrument to be negotiable, it must be payable to order or payable to bearer. The phrase "Pay to Bill Moore" is not sufficient. It does not state repay to the order of Bill Moore, therefore this instrument is not negotiable.

5. She should sign it "David Clark, by Michelle Clark, agent." If she fails to include his name along with her signature, Michelle could end up being liable on the instrument.

ANSWERS TO CASE PROBLEMS

I. Dowie is personally liable. A drawer of a check is personally liable on a check if there is no evidence, other than the fact that the corporate name was imprinted on the check and that the check was signed in a representative capacity. The fact that he alleged Colonial knew it was dealing with a corporation was not in itself sufficient for him to escape liability on the check. Dowie merely relied upon the fact that the name of the corporation was printed on the check. As no information was introduced by Dowie that there was an agreement or understanding between himself and Colonial that he was not to be personally liable on the check, the court held Dowie liable. Colonial Baking Co. of Des Moines v. Dowie, 35 UCC Rep. Serv. 874 (Iowa Sup. Ct. 1983).

2. The court held that as the name of the corporation was printed on the check, this was an indication that Cook had signed in a representative capacity.

This is a somewhat unusual decision. It should be noted to the class that the correct way to sign is for the agent to sign his or her name and the name of the corporation and to indicate that he or she is signing in a representative capacity. Failure to sign in this manner may in many cases result in personal liability of the agent. Valley National Bank, Sunnymead v. Cook, 36 UCC Rep. Serv. 578 (Ariz. App. 1983)

3. Yes. The notes were not negotiable because there was no unconditional promise to pay a certain sum Massachusetts follows the traditional approach that, as a matter of law, an instrument is conditional if it incorporates by reference a separate document making it impossible to know whether the obligation is certain or not until the document is examined United States v. Farrington, 172 F. Supp. 797( D.C. Mass. 1959).

4. No. To be a negotiable instrument, a note must contain an unconditional promise or order to pay a sum certain in money. The rate of interest on this particular note was uncertain at the time the note was made, and therefore the note was no negotiable. Writing in the applicable interest rate after the fact did not cure the defect. A. Alport & Son, Inc. v. Hotel Evans, Inc., 317 N.Y.S.2d 937 (N.Y. Sup. Ct. 1970).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 28 Transfer, Negotiation, and Holder in Due Course

ANSWERS TO DISCUSSION QUESTIONS:

1. An instrument must be transferred in such form that the transferee becomes a holder -UCC Section 2-302. To become a holder-of-an-order instrument, the person to whose order the instrument is written must endorse the instrument and deliver it to another person. To become a holder-of-a-bearer instrument and deliver it to another person. To become a holder-of-a-bearer instrument, the holder merely must deliver the instrument to another person.

2. A special endorsement specifies the person to whom or to whose order the instrument is payable. To negotiate such an instrument, the special endorsee must endorse the instrument and deliver it to someone else.

3. The FTC has adopted a trade regulation rule that applies to the transfer of consumercredit contracts. The FTC requires a consumer-credit contract to disclose, in boldface type, that any person who takes such an instrument takes it subject to any claims and defenses that the debtor could assert against the seller of goods or services obtained pursuant to signing the consumer-credit contract. Failure to comply with this rule is a violation of Section 5 of the Federal Trade Commission Act.

ANSWERS TO REVIEW PROBLEMS

1. Morris is not a holder in due course because he took the instrument with knowledge that it was overdue. However, Morris has all the rights of a holder in a holder in due course. The shelter provision of the UCC, Section 3-201(1), states that the transfer of an due course, as he took the instrument from Katz, who was instrument vests in the transferee such rights as the transferor had in the instrument.

2. Not necessarily. The UCC requires the courts to use a subjective test in determining whether a person took an instrument in good faith. Good faith is honesty in fact in the conduct or transaction concerned. It does not follow the standard of the reasonably prudent person acting under the same circumstances. If a person acted honestly, although perhaps not reasonably, he or she still may be regarded as having taken the instrument in good faith. Thus, such a person could be a holder in due course of such an instrument.

3. The UCC, in Section 4-208, states that the first credits given are the first withdrawn. Therefore, with respect to the first two checks written by Talbot on his account, these will be treated as a withdrawal of the $500 Talbot originally had in his account. Only on July 9, when the bank honors Talbot's check for $250, has it given value for Smith's check. At that point, it has given value for Smith's check.

4. Yes. Section 3-303(c) states that a holder takes an instrument for value when he gives a negotiable instrument for it.

5. This is a qualified endorsement. Such an endorsement would eliminate Christian's secondary or conditional liability as an endorser. However, such an endorsement does not eliminate the warranty liability of an endorser. (However, an unqualified endorser gives slightly different warranties to his or her transferee than a qualified endorser. (See UCC Section 3-417(3).)

6. This is a special endorsement. As this instrument was originally an order instrument, the effect of indorsing it with a special endorsement is that it remains an order instrument. This note can be validly negotiated only if Rose Davidson endorses it and delivers the note to a person

ANSWERS TO CASE PROBLEMS

1. A thief does not acquire title to an order instrument because there was no voluntary transfer of possession of the instrument to the thief, and therefore no negotiation of the instrument to the thief. Likewise, anyone the thief transfers an order instrument to will not get title to the instrument either. An order instrument must be delivered and properly endorsed to negotiate it. The forged endorsement by the thief here would be ineffective to transfer title to the instrument to the purchaser. The purchaser will not qualify as a holder of the instrument.

2. Yes. For purposes of determining its status as a holder in due course, the bank gave value to the extent that it had a security interest in an item. A bank has a security interest in an item deposited in an account to the extent to which credit given for the item has been withdrawn or applied. By causing the check to be endorsed for deposit as alleged, the payee signified its purpose of deposit, and the bank, by applying the value given consistent with this endorsement by crediting the payee-depositor's account with the amount of the check, became a holder for value. . Pazel v. Citizen National Bank of Sandy Springs, 138 S.E.2d 442 (Ct. of Ap. Ga., 1964).

3. The court ruled that the fact that Brownsworth was not a regular customer of the bank overlooks the fact that the manager of the bank called Murphy's bank to verify the account and the sufficiency of funds in the account. The court rejected the argument that Manufacturers did not act in good faith. The law favors the negotiability of a negotiable instrument. Manufacturers and Traders Trust Co. v. Murphy, 369 F. Supp. 11 (W.D. Penn. 1974).

4. No. A person taking an instrument must act in good faith and exercise such caution as a reasonable person would under the circumstances. The person is chargeable with the facts a reasonable inquiry would disclose. In the absence of anything to the contrary, the person may assume that the persons with whom he or she is dealing are acting honestly and in good faith. The court felt that nothing in the record would suggest that Jaeger was aware at the time of taking the check of any defense that might be brought up with respect to the check. Jaeger and Branch Inc. v. Pappas, 433 P.2d 605 (Utah 1967).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 29 Negotiable Instruments: Liability, Defense, and Discharge

ANSWERS TO DISCUSSION QUESTIONS

1. Three events generally must take place -- presentment, dishonor, and notice of dishonor. In rare instances protest is also required.

2. The endorser warrants (a) he or she has good title to the instrument, (b) all signatures are genuine and authorized, (c) the instrument has not been materially altered, (d) no defense of any party is good against him or her, and (e) he or she has no knowledge of subject to the defenses of mental incapacity, incapacity due to intoxication, duress, and illegality if they render the instrument void.

ANSWERS TO REVIEW PROBLEMS

I. If Jim has a real defense that he can use against Harry.

2. Yes. An unqualified endorser warrants to anyone he transfers the instrument to that he has good title to the instrument. Since the thief stole the instrument, the thief does not have good title to the instrument.

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 30 Negotiable Instruments: Checks

ANSWERS TO DISCUSSION QUESTIONS

1. The customer has a duty to discover and report to the bank forgeries and alterations on his or her checks when the customer receives a statement from the bank. The customer must exercise "reasonable care and promptness" in examining the statement and items to discover unauthorized signatures or any alterations. If the customer discovers an improper signature or alteration, he or she must notify the bank "promptly." If the customer fails to comply, he or she may not assert an unauthorized signature or any alteration as a defense against the bank if the bank establishes that it suffered a loss as a result of the customer's failure to comply with UCC Section 4-406(1).

2. The bank may charge its customer's account, even when the customer's signature has been forged, if the customer ratifies an unauthorized signature. It may also charge a customer's account if the drawer's negligence substantially contributed to a material alteration of an instrument or to the making of an unauthorized signature -- if the bank has paid the instrument in good faith and in accordance with reasonable commercial standards. The bank may also charge its customer' s account when the customer has failed to exercise reasonable care and promptness in examining his or her checks and has failed to notify the bank promptly of any forgeries of the customer's signature.

3. First of all, the customer must notify the bank in such time and manner as to give the bank a reasonable opportunity to act on the stop-payment order. If the order comes into the bank too late, the customer is responsible for the check.

Second, the drawer must have had a defense that would have been good against the person who presented the check. A personal defense would be sufficient if the presented was a mere holder of the check. If the presented was a holder-in-due-course, the drawer must have had a real defense that could have been asserted against the presenter.

4. If the drawer obtains certification of the check, the drawer remains secondarily liable. If the holder has it certified, the drawer and all prior endorsers will be relieved from liability.

ANSWERS TO REVIEW PROBLEMS

1. Yes. This is a postdated check. The code indicates that the negotiability of an instrument is not affected by postdating. This means that the check may be negotiated to Mark's bank before October 10. As he has no funds in his account, the bank very likely will dishonor the check. However, a bank can honor a check even if it creates an overdraft. This means that the bank could honor Mark's check even though he does not have sufficient funds in his account to cover the check.

2. This is called a stale check because it was presented to the bank more than six months after its date. It is possible for a bank to honor such a check. However, owing to the date, the better practice is for the bank to check with the drawer first. If the bank fails to check with its customer before honoring the check, the customer could argue that the failure to make such a consultation before cashing the check violates the bank's obligation to act in good faith.

3. Yes. No one can be a holder of an instrument with a forged endorsement. Andrew's indorsement was forged, therefore the bank had no right to charge Amy's account.

4. A bank may not charge a customer's account for a forged check, even if the customer's negligence substantially contributed to its forgery, if the bank failed to act in good faith and in accordance with reasonable commercial standards in the banking industry --Section 3-406.

Furthermore, even if a depositor fails to exercise reasonable care in examining its bank statement, a bank may not charge a customer's account if it fails to exercise ordinary care in paying a check -- Section 4-406.

ANSWERS TO CASE PROBLEMS

1. No. Whalley did not report the first forgery (or any forgery) within fourteen days of the receipt of the January bank statement, as required under Section 4-406(2)(b).

No. The unsupervised bookkeeping was held by the court not to constitute the exercise of reasonable care. George Whalley Co. v. National City Bank of Cleveland 380 N.E. 2d 742 (Ohio App. 1977).

2. No. Kidwell's failure to report did not excuse the bank. Under Section 4-406(3), if the bank did not exercise ordinary care, the bank is liable.

Yes. The facts support a finding that Exchange Bank did not exercise ordinary care in the handling of the checks. Exchange Bank and Trust Company v. Kidwell Construction Co. Inc. 463 S.W. 465 (Tex. Civ. App. 1971).

3. No. Section 4-406 requires that the customer exercise reasonable care and promptness in examining the monthly statements and concealed checks to discover unauthorized signatures and must notify the bank promptly after the discovery. If this is not done, then the customer is precluded from asserting this unauthorized signature against the bank and also subsequent unauthorized signature by the same wrongdoers, unless the bank did not satisfy its own duty of ordinary care. According to the court, the fact that the bookkeeper concealed the forgery does not free Zenith of its responsibility to exercise reasonable care in examining its own bank statement. As the plaintiff could not establish that Marine Midland failed to satisfy its burden of exercising ordinary care, the court held that the defendant bank did not have to credit Zenith's account in the amount of the unrecovered loss. Zenith Syndicate Inc. Y. Marine Midland Bank 23 UCC Rep. Serv. 1267 (1978).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 31 Electronic Fund Transfers

|ANSWERS TO DISCUSSION QUESTIONS

1. (a) Point-of-sale terminals, (b) automated-teller machines and cash-dispensing machines, (c) pay-by-phone systems, and (d) preauthorized direct deposits and automatic payments.

2. Article 4A is much broader, encompassing not only transactions governed by the EFTA, but all "funds transfers," defined as a series of transactions made for the purpose of paying the beneficiary. The EFTA covers only those fund transfers that (I) are initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape, and (2) it must order, instruct, or authorize a financial institution to debit or credit an account.

3. Doing so will prevent them from being held liable for transactions that should not have been completed.

4. Fedwire actually transfers fund, whereas CHIPS does not. Fedwire is governed by Regulation J and Federal Reserve Bank Operating Circulars, whereas CHIPS has its own internal rules of governance.

ANSWERS TO REVIEW PROBLEMS

1. The date on which the payment order is received is the execution date if no date is specified.

2. The receiving bank may be able to recover from the beneficiary to the extent allowed by the law governing mistakes and restitution.

3. If procedures required Local Bank to verify by telephone every transfer order of over $10,000 and the bank failed to do so, the bank could be liable. If the fax had been labeled, "urgent-transfer immediately," and Local Bank had been unable to reach anyone by phone.

4. They will have to prove that National Bank and Interco had agreed upon security procedures and that such security procedures had been followed and that the order had been accepted in good faith.

5. The originator bank bears the loss as long as Countrybank followed agreed-upon security procedures.

CASE PROBLEM

1. Ognibene will not be able to recover since it was his own negligence that led to the loss. Ognibene v. Citibank 446 NYS 2d 845 (1981).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 32 Secured Transactions

ANSWERS TO DISCUSSION QUESTIONS

1. Goods are classified as consumer goods, equipment, farm products, or inventory depending on their use.

(a) A stereo purchased for use in the home would be a consumer good.

(b) A typewriter used in an office would be an item of equipment.

(c) Materials used or consumed in business, such as pieces of plastic used in making toys, constitute inventory.

(d) Crops, livestock, and supplies are used in farming operations; corn, eggs, cows, pigs, and so on are farm products in the hands of the person or firm engaged in farming. Goods can become fixtures if they become so related to particular real estate that an interest in them arises under real-estate law. A stove built into a home changes from inventory (appliance dealer) to consumer goods (delivered to home) to fixtures (built into real estate).

2. The seller of inventory may finance that inventory with the manufacturer or a bank. The seller of the inventory is a debtor with regard to the loan from the bank (the bank will have a security interest in the inventory and proceeds therefrom). If the inventory is purchased on credit by a consumer or even another business, the seller would be a credit for that purchaser and would take a security interest in the goods sold.

3. Perfecting a security interest gives notice to other parties that the secured party claims a special interest in the collateral. While an unperfected security interest can be enforced by the creditor against the debtor, the perfected security interest may be enforced against other creditors who also claim some interest in the debtor's property.

ANSWER TO REVIEW PROBLEMS

1. Since a PMSI in consumer goods is automatically perfected without filing -- UCC Section 9-302 -- (a) is the correct answer, and Stryker would be protected against competing creditors with respect to equipment sold to consumers who purchased for their own personal use without filing. However, it would not prevail against a subsequent buyer who bought for personal use. Protection against another consumer requires filing. (b) is incorrect because the goods would be "equipment" in the hands of medical institutions, which must be perfected by filing. (c) is incorrect because the goods would be inventory in the hands of the retailers, which must be perfected by filing. (d) is incorrect because a "fixture filing" is necessary to perfect a security interest against competing creditors when the equipment becomes a fixture.

2. Yes, a security interest is perfected when it has attached and all steps necessary for perfection have been taken -- UCC Section 9-303. The bank's security interest attached on January 5, when the security agreement was signed, value was given, and Gilmore had the cars and trucks. It was perfected on January 10, when the financing statement was filed. Note that if the collateral had not been inventory, the perfection would have effectively related back to January 5 because the perfection took place within ten days after the creation of a PMSI -- UCC Section 9-312. This car is not subject to the security interest since a purchase in the ordinary course of business takes free of it. Since the car was inventory, it can be assumed the Bank consented to its sale. The Bank has a security interest not in the car, but in the proceeds Gilmore received from it.

3. Yes, a PMSI in consumer goods is perfected upon attachment (without filing) unless the goods are motor vehicles required to be registered or fixtures -- UCC Section 9-302. The security interest taken by Lowland is a PMSI since the seller is securing all or part of the purchase price. The goods are consumer goods in the hands of Lowland's buyers if they are bought for personal, family, or household purposes. Further, if one of Lawland's customers sells its purchased item to a bona fide purchaser, that purchaser is not subject to Lowland's security interest because a purchaser of consumer goods takes free of a perfected security interest so long as the security party has not filed a financing statement (which Highland did not do) if she or he purchases for value and without actual knowledge of the security interest for his or her own personal, family, or household purposes. The appliances are inventory in Highland's hands (held for sale not consumption) but consumer goods in the hands of the customers.

4. Yes, Second Bank can obtain priority to the extent of the value it has given ($25,000) since it has a PMSI. To do so, it must (I) perfect its security interest by filing at the time the debtor may receives possession of the inventory she is purchasing, (b) notify in writing any person (First Bank) who has previously filed financing statements covering inventory of the same type, and (c) describe the inventory by item or type.

5. Merchant Bank has priority. A security interest cannot be perfected until the secured creditor's interest arises, which cannot occur until the loan has actually been made. Since First National did not actually transfer funds until March 30, Merchant's perfection on March 10 was first.

6. They need to make sure the PMSI is perfected at the time of delivery. They need to give notice to the holder of the conflicting interest before the date of the filing or before the beginning of the 21 day period where the PMSI is temporarily protected without filing. The holder of the conflicting interest must be notified within five years before the debtor receives possession of the refrigerator, and the notice should state that the person giving notice will have a PMSI in the inventory item, which should be described.

7. A PMSI in consumer goods is automatically perfected, but the purchaser of a consumer good without knowledge of the security interest is not subject to the security interest. Adele owns the piano free of the security interest.

ANSWERS TO CASE PROBLEMS

1. The court found that as buyers in the ordinary course of business, they take free of the security interest created by the seller even though the interest was perfected. Cunningham v. Camelot Motors, Inc., 351 A.2d 402 (1975).

2. Butler is incorrect. The taking was not illegal. Buller v. Ford Motor Credit Co., 829 F 2d 568 (1987).

3. Yes. An unauthorized entry into a debtor's dwelling place is a breach of the peace. General Electric Credit Corp. v. Timbrook, 291 St. S.E. 2d 383 (1982).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 33 Rights of Debtors and Creditors

ANSWERS TO DISCUSSION QUESTIONS

1. He may obtain a lien against the debtor's assets, or, in the case of exigent circumstances, may use the remedies of attachment and replevin. He may also seek to use garnishment or, in exceptional cases, receivership.

2. Postjudgment, the creditor has the additional remedies of execution. Garnishment postjudgment is different in that the debtor is ordered to turn the assets over so they can be used to satisfy the judgment lien. (Prejudgment ganishment requires only the preservation of the assets pending resolution of the lawsuit.)

3. He would enter such an agreement if he feared he would receive nothing if the debtor went bankrupt.

4. Exempt property is property that by state law is exempt from a creditor's execution action. Most common is the exemption for a home.

5. A surety accepts primary liability for debtor's obligation whereas a guarantor agrees to pay only after debtor's default.

6. Often debtors get into trouble because if an original loan must be in writing under the Statute of Frauds, an oral extension of the agreement to renew the loan contract for several additional periods will also need to be in writing.

7. Punitives are usually allowed only where there is a showing of fraud or the intentional conduct uses to the level that the court feels should be subject to special treatment.

8. The sale is one not in the ordinary course of business in which over half of the seller's assets are transferred to a buyer who knows, or after reasonable inquiry would have known, that after the transfer the seller will no longer operate the same or a similar business

ANSWERS TO REVIEW PROBLEMS

1. Yes.

2. Yes.

3. They have the same defenses available as the primary debtors have.

4. Probably not. The extension required a writing under the Statute of Frauds.

ANSWERS TO CASE PROBLEMS

1. Yes. Younger v. Plunkett, 395 F. Supp. 702 (1975).

2. Yes, but only to the extent that the loss of value from the faulty repair is less than $5,000. Jetco v. Spizman, 735 S.W. 2d 54 (1987).

3. No. The perfected security interest existed first and thus takes priority. Chryster Credit Corporation v. Highway Towing Service, 793 S.W. 2d 222 (1990).

4. Surety wins. GMAC v. Daniels, 492 A.2d 1306 (1985).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 35 The Agency Relationship

ANSWERS TO REVIEW PROBLEMS

1. Agency is the legal relationship created when two people agree that one of them, the agent, is to represent the other, the principal, subject to the principal's right to control the agent's conduct concerning the delegated activity.

2. An agent is distinguished from an independent contractor in the degree of control that is exercised over the agent's activities. The principal has the right to control the activities of an agent. Independent contractors are hired to accomplish particular results.

3. The agency relationship is a fiduciary relationship because the agent is entrusted with matters affecting the principal's interests and property.

4. The principal owes the agent the duty to compensate the agent for the services the agent renders. In connection with this duty of compensation, the principal must indemnify the agent for the costs the agent incurs in furtherance of the principal's interests. The principal also is under a duty to assist and cooperate with the agent and not to interfere with the agent in the performance of his or her duties. Where it is customary and practical to do so, the principal is under a duty to render accounts to the agent. The agent is under a fiduciary duty of loyalty, a duty to obey, a duty to use skill and care, and the duty to inform and account to the principal on matters affecting the agency relation.

ANSWERS TO REVIEW PROBLEMS

1. Andrew was Penelope's agent. The fact that he was a gratuitous agent does not affect his agency status. As Penelope's agent Andrew violated his duty of loyalty when he purchased the second piece of equipment for himself. He also violated his duty of obedience and his duty of diligence when he left the auction before bidding on the third piece of equipment.

2. Yes. The Statute of Frauds requires written authorization before an agent's transfer of title to property is binding on the principal.

3. No. Unless the listing contract provides otherwise, a real-estate broker earns a commission only upon producing a buyer who is ready, willing, and able to purchase on the owner's terms. Since the buyer was unable to procure financing, the buyer was not able to purchase the property.

4. Yes Arnon was acting as a double agent without having fully disclosed this fact to the principals involved. Thus Arnon violated her fiduciary duty of loyalty.

ANSWERS TO CASE PROBLEMS

l. The Pennsylvania Supreme Court said no. Since Beck's agency relationship with the Sylvesters had terminated, he did not owe them any fiduciary duty to disclose to them the knowledge he had at the time of the resale. The court acknowledged that there would have been a different result if the Sylvesters had shown that Beck knew of the possibility of a sale to Epstein while he was still the Sylvesters' agent. Sylvester v. Beck, 178 A.2d 755, (1962).

2. The Court found a violation of the agent's duty of due diligence. Bucholtz v. Sirotkin Travel Agency, 363 N.Y S. 2d 415 (1974).

3. He is entitled to the compensation less the damages from embezzlement that were not covered by the $54,000. Brown County General Hospital v. Roberto, 571 N E. 2d 467 (1989).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 36 The Effect of Agency Relations

ANSWERS TO DISCUSSION QUESTIONS

1. An agent can affect a principal's liability in contract to third parties by undertaking dealings within the agent's authority.

2. An agent can affect a principal's tort liability by committing torts within the scope of the agent's employment.

3. An agent who negotiates contracts on behalf of a principal becomes liable to the third party when the agent fails to disclose the agency relation or when the agent exceeds his or her authority, thereby incurring liability under the agent's warranty of authority.

4. If notification is not given to third parties of the termination of an agent's authority, the agent's apparent authority may continue, exposing the principal to liability after the agent' s actual authority has been terminated.

ANSWERS TO REVIEW PROBLEMS

1. Caveat wins, because Profit ratified Anderson's unauthorized warranty.

2. Mrs. Terry is entitled to her bargain, because the clerk had apparent authority to mark down the merchandise.

3. Portaro will recover against Anderson for breach of Anderson's warranty of authority.

4. If Xenia performs her part of the bargain, she may hold Ambrose liable, because an agent for an undisclosed principal is liable on the contract he or she makes. Further, if Xenia learns of Principal's existence, she may elect to recover against Principal. If Xenia fails to perform, Principal may recover against Xenia.

5. Julius is liable for his own tort, which he committed during his employment.

6. The issues in this problem deal with termination of an agency arising out of the destruction of a plant by fire and the death of the principal. Terry should be able to collect against Paul's estate because although the plant fire may have terminated the agency relation, it was unknown by Terry. Thus Arnon's apparent authority would provide the basis for Terry's holding Paul's estate liable. Frank will not be able to hold Paul's estate liable, because Paul's death automatically terminated Arnon's authority. However, Arnon will be liable to Frank on the basis of Arnon's warranty of authority.

ANSWERS TO CASE PROBLEMS

1. All-Pro wins. The court held All-Pro was a disclosed agent, and thus did not assume liability for Archibald's nonappearance at Jones's basketball camp. Jones v. All-Pro Reps, Inc., 45AD. 2dS32(1974).

2. The agent may be liable to the Dembrowski's for fraud, because everyone is responsible for his or her own torts. However, Central Construction is not liable because they did not acquiesce to any actions that would have suggested the agent had the authority to make the deal in question. Central's actions, via the contract, contradicted the agent's claim. Dembowski v. Central Construction Company, 185 N.W. 2d 461 (1971).

3. Harvey is liable. If acting as an agent, one must so indicate a contract. Bio-Chem Medical Laboratories Harvey, 310 So. 2d 173 (1975).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 37 Farms of Business Organizations

ANSWERS TO DISCUSSION QUESTIONS

1. Corporations can raise capital and expand by selling stock. The shareholders have no personal liability. Ownership is easily transferable.

2. You should weigh the tax consequences, the degree of participation in management desired, the need to raise capital, and the potential for personal liability.

3. The partners agree to have partnership liability. All goods and services are in the partners' names.

4. Advantages include ease of formation, absence of corporate formalities, and retention of management control and profits by the owner.

5. They want to limit their liability, yet enjoy the top status as a partner.

ANSWERS TO REVIEW PROBLEMS

1. Yes. All partners are liable for the debts of the partnership. Each partner is an agent for the others.

2. Probably not. There is no clear tying product.

3. This is not a joint venture. There was no agreement to establish a joint venture, and no pooling of assets and labor to make a profit.

4. They formed a partnership.

ANSWERS TO CASE PROBLEMS

1. No. Absent showing that the creditor could have proceeded against stockholder individually, assignee had no right to pierce the corporate veil. Commonwealth Financial Corporation v. Sherrill, 197 Ga. App. 403 (1990).

2. No. Where evidence failed to show that principal engaged in fraud or transacted purely personal business to the extent it became his alter ego, the corporate veil would not be pierced. Gartner v. Snyder, 607 F. 2d 582 (1979).

3. McDonald's action was not considered unlawful because there was no evidence of any actual injury caused by the alleged tie-in. Kypta v. McDonald 's, 671 F. 2d 1282 (1982).

4. In the absence of exercise of control, the only way to show partnership is a written agreement. The burden of proof is high. The fact that tax returns listed the business as a sole proprietorship was significant. Miller v. City Bank and Trust, 266 N.W. 2d 687 (1978).

3. No. A person whose signature is used on a negotiable instrument without authority is not liable on it. The drawer has the real defense of forgery to any suit brought on the instrument.

ANSWERS TO CASE PROBLEMS

1. The courts in this case held that Jaroszewski must pay the note. Although the defense of fraud in the execution was raised, the evidence indicated that Jaroszewski had had reasonable opportunity to obtain knowledge of the note before signing. The document was clearly labeled, and his failure to read it thoroughly did not convert the situation to fraud in the execution. This was decided prior to the FTC rule. Waterbury Savings Bank v. Jaroszewski, 238 A.2d 446 (4th Cir. 1967).

2. No. She agreed to not raise such defenses and she therefore waived her right to do so. Heastie v. Community Bank of Greater Peoria, 727 F.Supp. 1133 (1989).

3. No. The only defense Brazil has is fraud, but this fraud is a personal defense, not a real defense. Therefore, it cannot be asserted against a holder in due course. Citizens National Bank of Guitman v. Brazil, 233 S.E. 2d 483 (Ga. 1977).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 38 Nature & Form of Partnership

ANSWERS TO DISCUSSION QUESTIONS

1. A partnership is an association of two or more persons to carry on as co-owners a business for profit

2. Treating a partnership as an entity means treating it as a person, separate and distinct from the partners. Treating a partnership as an aggregate means treating it as an association of partners. An example of treating a partnership as an entity would be in its ownership of real property. A partnership can own property in its own name. A partnership is treated as an aggregate when it comes to the payment of taxes.

3. The essential elements of partnership existence in Section 6 of the UPA are an association of two or more persons to carry on as co-owners a business for profit. Under Section 7 the sharing of profits creates a presumption of partnership existence.

4. A representation of partnership existence that is relied upon by a third party.

ANSWERS TO REVIEW PROBLEMS

1. Owner may not avoid liability merely by asserting an understanding between Owner and Seller that their relationship would not be a partnership. That is some evidence of their intent, but it will not serve to rebut partnership existence conclusively. Owner can assert the protected relation contained in Section 7 of the UPA for landlord-tenant relationships. However, if Owner has become so involved in Seller's business that Owner is effectively exercising that control over the business that is normally exercised by a partner, even the protection provided under Section 7 of the UPA for landlordtenant relations may be lost.

2. Yes. The UPA's definition of a "person," contained in Section 2 of the UPA, includes corporations. Most states have corporate codes that also permit corporations to become partners.

3. Mere co-ownership in a house would not satisfy the requirement contained in Section 6 of the UPA that the co-ownership be of a business. However, once Julius and Penelope begin to lease the house to renters, they are partners in a business.

4. Although the UPA requires that the business be "for profit," it is immaterial whether the business actually loses or makes money. Under the UPA it is the expectation of profits that satisfies the "for profit" requirement.

ANSWERS TO CASE PROBLEMS

1. The court found that a partnership existed, with Cold Storage furnishing financing while United made use of its position as buyer. Although Section 7(4) of the UPA provides that debtor-creditor relations are not partnership relations, here the lack of a profit ceiling would make the two corporations seem more like partners. Minute Maid Corporation v United Foods Inc. 291 F. 2d 577 (5th Cir. 1961).

2. The trial court concluded that no partnership existed since there was no provision regarding the amount of profits to ~e shared. The appellate court reversed, finding enough evidence of partnership existence and declaring that under Section 18 of the UPA, where the amount of profits is not specified, partners are to share equally in the profits. Presutti v. Presutti, 310 A.2d 791 (Md. App. 1973).

3. The question of whether a partnership exists need not always involve a case of a frustrated creditor in search of a solvent defendant. The issue of partnership existence perhaps more frequently confronts businesspeople dealing with government agencies. In Chaiken the court concluded that despite the partnership agreements, no partnership existed because the provision requiring that property provided by individual partners would revert to them upon dissolution was inimical to partnerships. Chaiken v. Employment Security Comm., 274 A.2d 707 (Del. 1971).

4. The Maryland court held that under the facts of the case it was convinced that a partnership existed between Mr. and Mrs. Gosman. The court concluded that the facts did not rebut the rule contained in Section 7(94) of the UPA that the "receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business." Accordingly, Mrs. Gosman was awarded 50 percent of the fair market value of the business complex and 50 percent of the balance of the checking account. Gosman v. Gosman, 318 A.2d 821 (Md. 1974).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 39 Operation & Dissolution of Partnership

ANSWERS TO DISCUSSION QUESTIONS

1. Partnership property is that property, both real and personal, that belongs to the partnership. A partner's interest in a partnership is the partner's share of the profits and surplus.

2. The absence of an agreement to the contrary, partnership profits are shared equally among the partners.

3. Dissolution refers to the change in the legal relations of the partners. Winding up refers to the termination of the partnership business.

4. The surviving partners may do only those things that are necessary and incidental to winding up the partnership affairs.

ANSWERS TO REVIEW PROBLEMS

1. The issue is whether guaranteeing a loan for the purchase of a car for the wife of one of the partners is a contract "for apparently carrying on in the usual way the business of the partnership." The answer is that it is not; hence Julius's act did not bind the firm.

Yes. Julius has bound himself on the loan. A creditor may reach a partner's partnership interest, because a partner's interest is the personal property of the partner.

As surviving partner, Penelope is now entitled to the partnership property.

With regard to the partnership property, Fifi has no rights because the property now belongs to the surviving partners.

2. Each partner is entitled to $100,000.

3. As an incoming partner, Frank is liable for all partnership obligations arising before his admission into partnership with Julius. However, this liability may be satisfied only out of the partnership property. Frank is liable to pay into the partnership what he promised to pay when he joined the partnership.

4. Curtis should win, because as he is the surviving partner, the partnership property now belongs to him.

5. Partnership assets= $176,000

Creditors' claims = 130.000

46,000

Anderson's loan = 40.000

6,000

Anderson's capital

contribution = 3,750

Baker's capital

contribution 2,250

6. Photo Film wins because it was not given actual notice of the dissolution of the partnership of Baker and Corbin. As a previous creditor of the partnership, it was entitled to actual notice.

7. If Brennan is incapable of acting as a partner, McCarty may seek a court order of dissolution

ANSWER TO CASE PROBLEMS

1. Under the UPA the administrator of a deceased partner has the power to consent in the continuation of the business. Such consent to the continuation of the partnership business by the surviving partner would entitle partnership creditors to recover on claims arising after the death of the deceased partner. Gianakos v. Magiros, 238 Md. 178 (1965).

2. The opportunity should have been offered to the joint venture. Salmon was breaching his fiduciary duty. Meinhard is entitled to an interest in the lease. Meinhard v. Salmon, 249 N.Y. 458 (1928).

3. Hess was not justified in doing what he did. He was earning profits to which his employer was entitled. Purtill v. Hess, 489 N.E. 2d. 867 (1986).

4. Kelly is entitled to keep the profits he made after the partnership dissolved. Kelly v. Smith, 588 N.E. 2d 1306 (1992).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 40 Limited Partnerships

ANSWERS TO DISCUSSION QUESTIONS

1. A limited partnership differs from the general partnership in that it has at least one limited partner whose liability is limited to the extent of his or her investment.

2. The limited partnership offers more flexibility than the corporate form. For example, formalities such as having a board of directors and holding an annual shareholders meeting are not necessary.

3. A limited partnership is created by the filing of the certificate of limited partnership that contains: the name of the limited partnership, the name and address of the statutory agent, the name and business address of each general partner, the date the limited partnership is to dissolve, and any other matters the general partners decide to include.

4. A limited partner will become personally liable for the debts of a limited partnership when his or her name is used on the partnership name or participates in the control of the business. A limited partner should take care to not participate in control of the business nor allow his or her name to be used in the partnership name.

ANSWERS TO REVIEW PROBLEMS

1. File a certificate of limited partnership in the appropriate office, usually that of the Secretary of State.

2. He should have a corrected certificate filed or give notice and withdraw completely from all future equity dealings of the partnership.

3. They must register their limited partnership in California.

4. Yes

5. No. There must be at least one general partner.

6. Yes.

7. If it is not clear that he is functioning in a separate capacity as an employee of the business (and others believe he is functioning as a general partner), he might lose his limited liability.

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 41 Introduction to Corporations

4 | ANSWERS TO DISCUSSION QUESTIONS

1. The chief characteristics of a corporation are (a) its juristic personality, (b) the limited liability of its owners, (c) its perpetual life, (d) the transferability of its ownership, and (e) centralization of its management.

2. The key distinction lies in their treatment for tax purposes. The C Corporation (all corporations except S corporations) is "double taxed." Its profits are taxed as corporate profits, and then as shareholders' profits. The S corporation is taxed as a partnership is taxed, solely on the shareholders' profits.

3. Public corporations are created and funded by the government to carry out some public purpose. Private corporations are created for private purposes.

ANSWERS TO REVIEW PROBLEMS

1. The limitation on liability and the ability to get money for expansion by selling stock make it desirable to change to a corporate structure. The "double taxation" is a disadvantage that could be eliminated by becoming an S corporation.

2. No. That privilege does not apply to corporations

3. The defense lawyer is right. Fourth amendment protection from unlawful searches does apply to corporations.

4. A shareholder agreement could have required that asset sales be approved by all holders of at least 25% of stock. She could sue the majority for attempting to "squeeze out" the minority.

5. The court held that the corporation as a legal entity and was subject to the state's gambling laws. It also held the president and other officers liable although they argued that the "corporate veil" could not be "pierced."

ANSWERS TO CASE PROBLEMS

1. Transfer of stock can be limited in the by-laws only if it is reasonable. Restricting the transfer as part of a divorce settlement is not reasonable.

2. The New York bank must pay. The court held that there exists a presumption of continued existence for a corporation. The law of Russia before the revolution did not differ from American law, thus it continues to exist. Kennerchesky v. National City Bank of New York, 170 N.E. 479 (1931).

3. If the corporation is a "dummy" for its individual stockholders, who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends, the stockholders would be personally liable. But in this case it was not shown that the defendant was conducting the business in an individual capacity. The corporate form may not be disregarded merely because the assets of the corporation, together with the mandatory insurance coverage of the vehicle that struck the plaintiff, was insufficient to assure him the recovery sought. Walkovsky v. Carlton 18 N.Y. 2d 414 (1966).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 42 Forming the Corporation

ANSWERS TO DISCUSSION QUESTIONS

1. Probably, although no such proposals have ever been made and challenged.

2. The steps necessary for incorporation include: planning of the venture by the promoter and effectuating its organization; selecting the state of incorporation; drafting and filing of articles of incorporation by the incorporators; and holding the organizational meeting for the purposes of adopting the bylaws, electing the officers, transacting initial business and adopting preincorporation contracts.

3. If the corporation does not adopt his preincorporation contracts, he may be personally liable on them.

4. There are three circumstances where an incompletely unincorporated corporation may be treated as incorporated: De jure incorporation -- No useful purpose will be served by a strict technical interpretation that would render the corporation unincorporated. Noncompliance was only slight. De facto incorporation -- There was a good faith attempt to comply, but significant defects existed in the attempted incorporation. Only the state may challenge the corporate status. Incorporation by estoppel -- A third party dealt with the defectively incorporated entity as if it were incorporated.

5. These circumstances were listed in the Passalacqua Builders case. They include: (I) the absence of corporate formalities; (2) inadequate capitalization; (3) whether funds are put in and taken out of the corporation for personal use; (4) overlap in ownership, officers and directors; (5) common space, address, and phone numbers of entities; (6) amount of business discretion displayed by allegedly dominated corporation; (7) whether related corporations deal at arm's length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantees of debts of dominated corporations by the other corporations; and (10) whether the corporation in question has property used by the other corporations as if it were their own.

ANSWERS TO REVIEW PROBLEMS

1. The court held that the three parties were not personally liable, because they were not officers or directors of a corporation, as no corporation ever came into existence. Also, the court stated that the parties did not hold themselves out as officers and took no part in the operation of the corporation.

2. The court ruled in favor of A, indicating that A's articles of incorporation (chapter) were broadly enough stated so that the sale of bronze markers was proper to the conduct of its business.

3. Under the circumstances of this case and where certain acts were done in attempted execution of the powers conferred by the certificate of incorporation, a jury was justified in finding that the company was, at the time of the accident, a corporation de facto, and therefore liable.

4. The court held that the requirement that the statement of incorporation be sealed is not a mandatory requirement that the signatures be followed by a scrawl or printed seal, as the purpose of the statement is to make a public record of the corporation, and the objective of the law is not promoted by making the seal a prerequisite to the legal existence of the corporation.

ANSWERS TO CASE PROBLEMS

I. The general rule is that promoters of a corporation are personally liable on their contract, even though made on behalf of a corporation to be formed, unless the contract is made in behalf of the corporation and the other party agrees to look to the corporation and not to the promoters for payment, in which case no personal liability is incurred. Where the entire transaction contemplated the corporation as the contracting party, personal liability of the promoters does not arise. Quaker Hill v. Parr, 148 Colo. 45 (1961).

2. Henderson won, because a preincorporation agreement between stockholders, in a majority of state, is valid unless fraud is involved or other stockholders are injured. Henderson v. Joplin, 217 N.W. 2d 924 (1974).

3. Bank won. The court said a de facto corporation existed, because there was a goodfaith attempt to comply with New York incorporating rules, and the corporate name was used many times. Bankers' Trust Company v. Zachery, 426 N.Y.S. 2d 960 (1980).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 43 ANSWERS TO DISCUSSION QUESTIONS

1. The prevailing rule is that a preincorporation subscription may be withdrawn at any time before the corporation comes into existence.

2. The board of director determines the value of shares to be received as consideration.

3. The "true value" rule requires that the assets given in consideration for the share were actually worth the price. The good-faith rules assume that the valuation made by the corporation will be upheld as long as it was honestly made and the directors exercised a degree of care that a prudent person would exercise. It assumes no fraud or bad faith on the part of the directors.

4. The transfer of stocks and bonds are governed by Article 8 of the UCC.

ANSWERS TO REVIEW PROBLEM

1. The corporation accepted the subscriber's offer, and the subscriber acknowledged acceptance. After payment of the subscription price, the subscriber was listed as a stockholder in an affidavit, and the subscriber made inquiries concerning his certificate and requested the promoter to sell his stock. A promoter is not liable to a stock subscriber where there is a valid incorporation pursuant to the terms of the subscription contract. The offer to subscribe for stock was accepted by the corporation and the contract could not be rescinded by the subscriber.

ANSWERS TO CASE PROBLEMS

1. A creditor who asks for such relief against a stockholder should show his or her own equities providing for the relief. Thus, someone who was not the original creditor but purchased the claims after the corporation had become insolvent and its affairs had been placed in the hands of a receiver, should specify the price of the claims, or at least show a substantial consideration was paid for them. Equity will not grant such relief for the benefit of those who have brought up claims against an insolvent corporation for a nominal consideration for the purpose of speculating on the liability of stockholders.

2. The court held that the directors of a company may purchase property necessary for their business and issue stock to the amount of the value of the property. But they were not entitled, as against creditors, to issue stock in payment of property transferred to the corporation at a value based on a capitalization of contemplated profits. The court held that the stock of the corporation was issued at an inflated valuation and not in good faith for the property actually delivered. See v. Heppenhumer. 61 A 843 (1905).

3. The court held for Nebraska Chicory, stating that there was mutuality of assent and thus an enforceable contract. Nebraska Chicory Co. of Schuyler, Nebraska v. Lednicky, 113 N.W. 245 (1941).

4. The court in this landmark case ruled for Handley, the purchaser of shares, stating that if he purchased in good faith it would make an exception to the rule that par value shares must be issued for no less than par. Handley v. Stuts, 139 U.S. 417 (1891).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 44 Managing the Corporation

ANSWERS TO DISCUSSION QUESTIONS

1. The broader the statement is, the greater flexibility the corporation has.

2. Ultra views transactions used to be void, but now they are merely voidable.

3. Cumulative voting helps minority shareholders because it makes it sometimes possible for them to elect a single director because they can pool all their votes to vote for one director. This effect can be diluted if the election of directors is staggered because the fewer the number of directors elected each time, the less likely the minority will have enough votes cumulatively to get one director elected.

4. Minority shareholders bring suits: (a) to enforce the right to vote, (b) to sue for breach of a shareholder agreement, (c) to enforce the right to inspect books and records, (d) to compel the payment of dividends, and (e) to protest preemptive rights.

ANSWERS TO REVIEW PROBLEMS

1. The court held that the corporate bylaw giving the corporation the right or first option to purchase the stock of the deceased stockholder at the price that it originally received for the stock was reasonable and valid. What the law condemned is an effective prohibition against transferability itself and not a restriction, as in this case.

2. A's defense was not valid A corporation's powers may be expressed or implied. They are expressed in by-laws as well as articles of incorporation, and by statute. Powers are implied to do whatever is reasonably necessary to promote the express powers unless prohibited by law. The executive committee's right to purchase stock from shareholders was implied and did not have to be approved by the board.

3. C won. The court stated that neither the bylaws nor the articles of incorporation forbid entering into this form of agreement. The board of directors would not ordinarily pass on such a contract.

ANSWERS TO CASE PROBLEMS

1. The proposals made by the stockholder were proper subjects of action by the stockholders within the proxy rules of the SEC. In enacting the Securities Exchange Act, Congress intended to require fair opportunity for operation of corporate suffrage, and control of great corporations by a very few persons was an abuse that Congress struck down in enacting the sections relating to proxies. Securities Exchange Commission. TransamericaCorp., 163F.2d511(3rdCir. 1947)Cert. denied, 332 U.S. 847 (1948).

2. The court held that a solvent corporation's directors cannot take over a corporate contract for their own profit because of the corporation's financial inability to perform the contract. The opinion stated, "If the directors are uncertain whether the corporation can make the necessary outlays, they need not embark it upon the venture; if they do, they may not substitute themselves for the corporation any place along the line and divert possible benefits into their own pocket." Irving Trust Co. v. Deutson, 73 F.2d 121 (2d Cir. 1934) cert. denied, 274 U.S. 708 (1935).

3. Section 16(b) provides that a corporation may recover for itself the profits realized by an owner of more than 10 percent of its shares from a purchase and sale of its stock within any six-month period, if the owner held more than 10 percent of the stock at the time of both purchase and sale. The owner of 13.2 percent of a corporation's shares who disposed of his entire holdings within six months of purchase by two sales, with the first sale reducing his holdings to 9.96 percent and the second sale disposing of the remainder, was not liable to the corporation for profits derived from the second sale. Reliance Electric Co. v. Emerson Electric Co, 404 U. S . 418 (1972).

4. The court held that a stockholder who bought shares in a corporation for the sole purpose of bringing suit to compel the corporation to produce its books and records, and who was motivated by preexisting social and political beliefs that the corporation should not be manufacturing ammunition to be used in the Vietnam War, did not have a right to inspect the records. He had no concern for the economic well-being of the corporation and did not have a proper purpose germane to his or her interest as a stockholder, the court said. Pillsbury v. Honeywell, Inc. 291 Minn. 322, 191 N.W. 2d 406 (1971).

5. The minority shareholder prevailed in this action. An officer-director of a closely held corporation is bound by the rules of corporate law preventing such officials from using assets of the corporate entity for personai gain. Shareholders have a remedy in equity to compel the declaration of a dividend. A corporation may choose to retain surplus earnings to ensure financial stability and for internal policies, as long as it does not act in bad faith. A corporation may not in bad faith or through oppressive action choose to declare or refrain from declaring dividends clearly warranted by the profit position. Cole Real Estate Corp. v. People 's Bank and Trust Co., 310 N.E. 2d 275 (Ct. App. Ind. 1974).

6. The court held that the contract was valid and enforceable when the commissions charged were reasonable and the contract was fair, just, and beneficial to the corporation. This assumes that there was no fraud or over-reaching present. Wiberg v. Gulf Coast Land and Development Company, 360 S.W. 2d 563 (Tex. Cir. App. 1962)

7. They are not seeking to examine the books for a proper purpose, so their request will be denied. Schakowsky v. National Tea Company, 302 N.E. 2d 118 (1973).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander

Ch. 45 Corporate Managers, Dissolution & Termination

|ANSWERS TO DISCUSSION QUESTIONS

1. The short form merger is more efficient, and since the corporation already owns a minimum of 90% of the nonsurviving corporation, there is really no need to go through the approval process. The merger is really just a technicality.

2. Factors would include cost considerations, whether the disappearing firm has any good will, and what the potential future liabilities and assets of the disappearing firm would be.

3. The following factors might lead to liability from an asset purchase: (1) Where there is an express or implied agreement of assumption, (2) Where the transaction amounts to a consolidation or merger, including a de facto merger, of the purchaser and seller corporations; (3) Where the purchaser is merely a continuation of the seller, or (4) Where the transaction is for the fraudulent purpose of escaping liability for the seller's obligations.

4. A shareholder can obtain involuntary dissolution when (1) the directors are deadlocked in a manner that is harmful to the corporation, (2) the shareholders are deadlocked and cannot elect directors, or (3) the directors are acting contrary to the best interests of the corporation.

ANSWERS TO REVIEW PROBLEMS

1. A merger has taken place.

2. He may bring an action asking the court to determine the fair value of his shares. This option is available to him only if he follows the appropriate procedures for dissenting from the merger

3. Probably, because liabilities may not be avoided when the purchaser is simply a continuation of the seller.

4. Joe may want to seek involuntary dissolution of the corporation.

ANSWERS TO CASE PROBLEMS

1. The court looked at the fact that the action was an arm's-length transaction and included a provision that limited the purchaser's liability for defective products. Nissen Corporation v. Miller, 594 A2d 564 (1991).

2. The trial court granted summary judgment in favor of the new corporation. The sale was an arm's-length sale of assets; the new corporation has no relationship to the old and cannot be held liable for errors of the old corporation. Chemical Design Inc. V. American Standard, 847 SW2d 488 (1993.)

3. Dissolution was too drastic a remedy in this case in which the less drastic remedy of purchase of the minority shareholder's interest at fair market value was available. Balvik v. Sylvesler and Weldon Corporation, 411 NW2d 383 (1987)

4. The successor corporation is liable for both compensatory and punitive damages of the merged corporation. Celotex Corp. V. Pickett, 490 F2d 35 (1986).

Last Updated April 8, 1997 by Dawn D. Bennett-Alexander