I. James Jones and Sandra Smith have decided to open a sporting goods store as co-owners. On September 1, they met to discuss how to begin the business.
James told Sandra that a friend of his, Peter Property, had offered to lease a great store location for $1,000/month, but Peter needed an answer by the next day because he had another potential lessee. Sandra told James, “That sounds great. You go ahead and take care of it.”
Sandra then told James, “My friend Laura Lawyer, who’s an attorney, says we probably should incorporate the business.” James and Sandra immediately called Laura and Laura told them she would be happy to do the work for free. Laura said, “I’ll have the articles of incorporation to you in two days and I’ll file them as soon as you approve them. Once I do that, you’ll have a corporation.” They told her to go ahead and to call the corporation Sports, Inc.
The next day (September 2), James met Peter and signed a contract to lease the store space for $1,000/month. He signed the contract: “Sports, Inc., by James Jones.” Before signing, James told Peter the corporation was not yet formed. Peter said, “That’s O.K. Don’t worry about it.”
On September 4, James and Sandra received the articles of incorporation from Laura. They told Laura to file the articles and she did so that same day, in a state that has adopted the latest version of the Revised Model Business Corporation Act.
The articles named James and Sandra as the initial directors of the corporation. On September 5, James and Sandra held an initial directors’ meeting. They authorized the sale of stock to themselves for $5,000 each and adopted a resolution approving and accepting corporate liability on the lease contract.
Discuss whether James and/or Sandra are personally liable on the lease contract with Peter. (Do not discuss veil-piercing.) (20 points)
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II. Bob and James have been friends since high school. They decide to start a business (B&J Property Management) to acquire residential structures, fix them up, and then sell or rent them.
They used some of their retirement money to capitalize the business. Bob put up $100,000 and James put up $80,000 for a total of $180,000. However, both men agreed that each one would have equal authority to manage and operate the business. They acquired six properties for $30,000 each.
Without any formal or informal written agreement, they purchased the properties in the name of B&J Property Management and operated as a business for nine months. They leased an office, bought office furniture, opened a bank account, and obtained printed stationery.
James’ sister Lisa moved into one of the homes. Lisa had not paid her rent for the last six months. Bob initiated eviction proceedings by sending Lisa notice to vacate the premises within ten days, as required by the lease. James challenged Bob’s authority to file the eviction without his agreement. No court proceedings have yet occurred in the eviction.
Although the relationship between Bob and James is strained, Bob and James decide that they should seek legal advice on how they should structure their business as well as other outstanding legal issues. They have concluded that they should either incorporate as a corporation or form a limited liability company.
1. Explain the common characteristics and differences between corporations and limited liability companies.
2. Explain the advantages of corporations and the advantages of limited liability companies.
3. What would you recommend to Bob and James to resolve their disagreement over whether to evict Lisa? (20 points)
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III. Abby and Paula entered into a valid contract under which Abby agreed to buy and Paula agreed to sell for $1.5 million, a printing press for Abby’s business. Abby made a $500,000 payment to Paula at the time of the sale and agreed to make the final payment of $1 million in six months.
Just prior to the date the final payment was due, Abby sold her business, including the press, to Bert. As part of the sale, Bert agreed with Abby to pay Paula the $1 million due her. Abby represented in the purchase agreement between Abby and Bert that all of the business equipment was in working order, although she knew that the press never functioned as it was intended to. In fact, Abby had previously requested of Paula that she repair or replace the press, but Paula had refused to do so.
After Bert bought the business, he discovered the problem with the press. He told Paula that he would not pay her the $1 million due until she repaired or replaced the press. Paula immediately filed a breach of contract lawsuit against Bert for the outstanding $1 million balance. Bert denies any obligation to pay Paula the $1 million on the basis that he had never entered into any contract with Paula.
In addition, Bert asserts two other defenses: First, that the printing press is defective and unsuitable for its intended purpose. Second, that Abby materially misrepresented the condition of the press.
(a) Under what theory or theories may Paula be successful in her breach of contract action against Bert? Discuss.
(b) What is the likelihood that the additional defenses asserted by Bert will prevail? Discuss. (20 points)
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IV. Dale and two friends decide to supplement their incomes during college by buying two snow blowers and several shovels, which they use to clear snow for businesses and homeowners. The season ends profitably and they divide their earnings three ways. They decide to call themselves the “Three Grunts,” and post ads using that business name. The three friends continue their winter enterprise for four years, always sharing the costs and profits equally, but never with any written agreements.
After leaving college, Dale’s two friends moved on to other careers. Dale, however, decides to stay committed to the “Three Grunts” business. He gains the concurrence of his two friends and properly forms a new business called “Three Grunts Limited Partnership.”
The friends agree to a limited partnership agreement which provides that all of the original Three Grunts business assets will be owned by the new limited partnership. In exchange, Dale’s two friends will each hold a 10% limited partner interest. The agreement also provides that Dale may add additional limited partners, using a portion of his 80% general partner interest as consideration for the new limited partner investments.
A year later, Dale invites Carl Grunt, an experienced snow plow driver, to join as a 5% limited partner. Carl is employed as General Manager for the business enterprise, with responsibility to hire and manage the contract labor.
Dale desires to grow the business and sees a request for proposals for snow removal at a large community shopping mall. This is the biggest job ever tackled by Three Grunts, and to succeed, they need to buy bigger equipment. Dale presents the proposal to all of the partners at a partnership meeting. They all agree to contribute more capital if they get the job. Three Grunts Limited Partnership bids for and wins the job. Dale signs the final contract which states that the contract can be terminated without cause on 30 days’ notice.
As General Manager, Carl visits New Auto alone and buys a new truck to be outfitted with a snowplow. As he picks out the truck, he states, “My employees are going to love the cherry color.” The truck is bought in the name of “Three Grunts Limited Partnership,” and the purchase agreement is signed by Carl as “Carl Grunt, General Manager.” The purchase is financed by New Auto, relying only upon financial information of Three Grunts Limited Partnership.
Six months into performance of the Mall Contract, the Mall Owner lawfully terminates the contract. Three Grunts Limited Partnership stops making its truck payments.
New Auto sues Carl individually and the Three Grunts Limited Partnership in state court to collect the balance due on the truck loan.
(1) Describe the nature of the business relationship among Dale and the two friends while they were in college.
(2) Discuss the basis of New Auto’s legal claims against Carl. (Do not discuss issues of apparent agency.) (20 points)
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V. Walter contacted his friend Buddy Wood, who was a salesman for the Dallas Bankston Nissan dealership, to discuss purchasing a pickup truck. Buddy represented to Walter that the value of the high-performing Nissan truck was $35,000. Walters test drove the pickup in question and agreed to purchase it. Wood prepared a Workup Sheet which showed the pickup to be a 2020 model. He also prepared an Odometer Statement and a Warranty Sheet, both of which showed the pickup to be a 2019 model. Walter purchased the pickup for $33,000 and took possession of the pickup. On his way out, he thanked Buddy for his excellent service.
Several days later, Walter experienced mechanical difficulty with the pickup and returned it to Bankston, who repaired the problem at no cost. Walter subsequently experienced additional problems with the pickup. During this time, Walter’s credit union notified him that the truck was a 2019 model, not a 2020 model, and that it would not finance the truck. The actual value of the pickup as received was $28,000. Walter then demanded that Bankston take back the pickup. Bankston refused and Walter filed suit.
(a) Assuming Walter will prevail in this lawsuit, calculate the damages for fraud using both the (1) benefit-of-the-bargain rule and (2) the out-of-pocket rule. Define the rules and then complete the calculation.
(b) Would Walter prefer the benefit-of-the-bargain damages or the out-of-pocket damages? Explain. (20 points)