FINAL EXAMINATION

BUSINESS ORGANIZATIONS

FALL, 1997

PROFESSOR KLEINBERGER

General Instructions

This is an open book examination. You may use the agency and partnership book, the assigned photocopied materials, any additional photocopied materials distributed by the professor during the semester and any notes you have made or developed in studying for the course or the exam. You may use outlines or other notes developed by a group of students enrolled in this course this semester if you played a substantial role in the development of the group outline or notes. Except as stated in the second and third sentences of this paragraph, you may not use treatises, hornbooks, commercial outlines, other commercial works or any other materials prepared by others.

This examination lasts three hours and has two parts. Part One consists of five separate questions, each based on a separate fact pattern and each requiring a relatively short answer. Part Two consists of a single fact pattern, requiring a more intricate answer. Each Part of the examination is equal in weight to the other Part. That is, the five questions in Part One, taken together, have the same weight as Part Two.

Please keep in mind that "spotting issues" is only the first step in doing a legal analysis. You must also take the issues you identify and organize them into a coherent structure. Then, within that structure, you must examine those issues (by applying the law you see as relevant to the facts you see as relevant) and argue for some conclusion. For the questions in Part One, your analysis will be less complicated than in your answer for Part Two. But for both Parts, your answers must reflect a coherent analysis.

Please do not write about subjects that are not germane to your analysis. Writing a "treatise" on some area of law that the question does not put in issue wastes your time and conveys the unfortunate impression that you do not understand which issues are relevant.

To the extent that your analysis involves a particular statutory provision, you MUST cite that provision. If your analysis involves the construction (as distinguished from mere application) of a particular word, phrase or provision, it may make sense to quote that word, phrase or provision. Otherwise, do not waste your time quoting the statute at length. (On the other hand, if you can quote a piece of a statute faster than you can paraphrase it, feel free to do so.) There is no need to cite case names. If citing case names helps you, feel free to do so. Do not, however, use case names as a substitute for stating the law.

The grading rewards coherence. It will probably be worth your while to take some time to think about the organization of your answer before you begin writing. Ask yourself:

whether you have identified all the necessary parts to your analysis;

whether all the issues you have identified are actually necessary; and

whether you have organized your issues in a way that is likely to make sense to your reader.

Please write legibly. Please write on only one side of each page. If legibility is not your strong point, please skip every other line as you write.

Budget your time.

BUDGET YOUR TIME.

BUDGET YOUR TIME.

BUDGET YOUR TIME.

Applicable Law and Related Matters

Unless a problem specifically indicates to the contrary:

1. Any reference to a partnership means an ordinary general partnership.

2. General partnerships are governed by the Uniform Partnership Act as included in the materials.

3. Corporations are organized under the law of a state that has adopted the Revised Model Business Corporation Act, except as to derivative lawsuits and the duties of directors.

a. As to derivative lawsuits, the state slavishly follows Delaware court opinions.

b. As to the duties of directors, Minn.Stat. § 302A.255 applies (the version that appears in the photocopied materials); otherwise the state slavishly follows Delaware court opinions.

Part One

A. This question is based on the following excerpt from a recent decision of a federal district court. The excerpt recounts the plaintiff's allegations.

At some time prior to November 11, 1994 the plaintiff Barbara Haybeck became a customer of the defendant Prodigy. Prodigy sold time on their computer service and Barbara bought same. Jacob Jacks was an employee of Prodigy. Mr. Jacks was a sexual predator who had full blown AIDS, [the latter] fact known and admitted by Prodigy. . . . By using his position as an employee of Prodigy, Jacks was able to spend countless hours on-line with plaintiff while he was at work at Prodigy's offices. In addition, Jacks gave plaintiff months of "free time" on the Prodigy network, as well as unlimited use of his own Prodigy account. The motive for this conduct was solely to entice Barbara Haybeck, by any means necessary, into an illicit and aberrant relationship that resulted in her having a consensual sexual relationship with Jacks. Both before and during this relationship, Jacks repeatedly denied [to Haybeck] having AIDS. Thereafter, and as a direct result of this sexual relationship, Barbara Haybeck contracted AIDS -- from which she will die.

Assume that (i) plaintiff Haybeck's allegations are true; (ii) Jacob Jacks' conduct constituted an intentional tort; and (iii) plaintiff Haybeck can prove causation and damages. Is defendant Prodigy vicariously liable to plaintiff Haybeck? Explain.

B. Following its recent failed attempt to acquire Sunshine Bank Corp. ("Sunshine"), Third Bank, Inc. ("Third Bank") received a substantial termination fee from Sunshine. Third Bank used a substantial portion of that fee to pay bonuses to its employees. At the annual shareholders meeting, an irate shareholder asked why the company had paid employee bonuses rather than distributing the money to shareholders. Third Bank's CEO responded, "Once in a while, it's nice to be nice." Aware of applicable legal doctrines, Third Bank's Vice President for Legal Affairs leaped to her feet and said, "Let me put the CEO's observation in context."

1. Imagine what the Vice President then said and explain why she would have said it.

2. Assume that, despite the explanations from the CEO and Vice President, the irate shareholder remained irate and filed suit against the board of directors for "wrongfully and unjustifiably declaring bonuses which amount to a waste of corporate assets." Would the suit be direct or derivative? Explain.

C. This question is based on the following excerpt from a recent decision by the Minnesota Court of Appeals:

In June 1996, appellant A/AL, Inc. (d/b/a Faribo Bottle Shop), a licensed off-sale liquor store, brought a declaratory judgment action against respondent City of Faribault, challenging the city's ordinance prohibiting off-premise liquor sales on New Year's Day, Memorial Day, Independence Day, and Labor Day.

. . . .

The hours and days of sale of intoxicating liquor for off-premise consumption is regulated by Minn.Stat. § 340A.504, subd. 4 (1996), which provides:

No sale of intoxicating liquor may be made by an off-sale licensee: (1) on Sundays; (2) before 8:00 a.m. on Monday through Saturday; (3) after 10:00 p.m. on Monday through Saturday at an establishment located in a city other than a city of the first class or within a city located within 15 miles of a city of the first class in the same county; (4) after 8:00 p.m. on Monday through Thursday and after 10:00 p.m. on Friday and Saturday at an establishment located in a city of the first class or within a city located within 15 miles of a city of the first class in the same county, provided that an establishment may sell intoxicating liquor until 10:00 p.m. on December 31 and July 3, and on the day preceding Thanksgiving Day, unless otherwise prohibited under clause (1); (5) on Thanksgiving Day; (6) on Christmas Day, December 25; or (7) after 8:00 p.m. on Christmas Eve, December 24.

The issue here arises under Minn.Stat. § 340A.504, subd. 6 (1996), which states:

A municipality may further limit the hours of sale of alcoholic beverages . . . . A city may not permit the sale of alcoholic beverages during hours when the sale is prohibited by this section.

The challenged ordinance (Faribault, Minn., Ordinance 96-15, amending Faribault, Minn., City Code § 4-34(d) (1996)) . . . [prohibits] sales on New Year's Day, Memorial Day, Independence Day, and Labor Day.

On appeal, appellant argues that the ordinance is invalid because it exceeds the authority granted to municipalities to regulate sale of alcoholic beverages.

Who is right, the appellant Bottle Shop or the respondent City of Faribault? Explain.

D. In the divorce suit that dissolved the marriage of Dorothy Lee Drake and Lawrence Edmund Drake, the only parties were Dorothy and Lawrence. One of the marital assets was 100% of the stock in a Minnesota corporation named Dutch Magic of Long Lake, Inc. ("Dutch Magic"). The court awarded Lawrence all the stock in Dutch Magic. The court also ordered Lawrence to make certain payments to Dorothy. Lawrence failed to make those payments. As a result, as part of the same divorce proceeding, the court ordered Dutch Magic to make certain payments to Dorothy. Did the court have jurisdiction to make that order to Dutch Magic?

E. Avaler, Inc. ("Avaler") plans to merge with Great Name, Inc. ("Great Name"). Under the plan of merger: (i) Great Name will merge into Avaler; (ii) Great Name's shareholders will be compensated in cash; and (iii) Avaler will comply with relevant state "assumed name" statutes so as to be able to do business under the name of "Great Name."⁽¹⁾ Are the shareholders of Avaler entitled to vote on the merger? Explain.

Part Two

Tinkers, Evers and Chance is a law firm practicing as a general partnership. When the events relevant to this Part began:

1. the firm had 20 partners; and

2. the partnership agreement provided that:

a. a sole managing partner controlled the firm's day-to-day operations and had the authority to enter into all contracts "necessary and proper to the functioning of the partnership,"

b. the managing partner had a 10% override on annual firm profits, in addition to any profits allocated to the partner on account of the his or her lawyering work,

c. of the rest of firm profits, 70% were allocated according to a formula based on hours billed and revenues generated and 30% were allocated by the managing partner "in that partner's sole and absolute discretion,"

d. the managing partner could be discharged as manager "for cause properly shown by a vote of a 2/3 of the persons then partner or without cause by a vote of 3/4 of the persons then partner,"

e. if the position of managing partner became vacant, a successor would be "appointed by the written consent of a majority of the partners," and

f. any partner could be expelled "without cause by a vote of the majority of the partners including the managing partner or without cause by a vote of 2/3 of the partners not including the managing partner,"

g. upon the expulsion of any partner the partnership business would continue without liquidation, the dissolved partnership would be immediately wound up and terminated by having all of its affairs automatically transferred to a successor partnership, and the expelled partner would be paid, as a creditor, in 36 monthly installments, a "separation payout" equal to the greater of:

i. the partner's capital account, or

ii. 4 times the partner's average profit share over the last three years, and

h. the firm used the calendar year as its fiscal year.

3. Tinkers, who had founded the firm, had served continually as the managing partner ever since the firm was founded.

Tinkers made decisions in an autocratic manner and eventually ruffled a lot of feathers among the partners. In particular, three years ago, he alienated several influential partners by vehemently opposing the firm's taking a potentially lucrative contingency case. Tinkers relented only when three partners threatened to leave the firm in order to take the case. For the next two years, Tinkers repeatedly bad-mouthed both the case and the three partners working on the case. Last year, when it became apparent that the firm would settle the case for a very large amount, Tinkers began to chortle about his "10% off the top."

Last month, the three partners working on the contingency case staged a "palace coup." Without confronting or even informing Tinkers, they drafted three memos, as follow:

	Memo Captioned As	Number of Partners Who Signed	Effective Date
First Memo	Written Vote to Remove Managing Partner	15	"immediately as soon as 15 partners have signed"
Second Memo	Written Consent to Appoint Evers Managing Partner	12	"immediately after the 'Written Vote to Remove Managing Partner' takes effect, provided that 11 partners have signed"
Third Memo	Written Vote to Expel Tinkers as Partner	12 (including Evers)	"immediately after the 'Written Consent to Appoint Evers Managing Partner' takes effect, provided that 11 partners have signed"

Each of the three memos was "bare bones." That is, each merely recited the applicable language from the partnership agreement, stated that the memo effectuated the intent stated in the memo's caption, and provided signature blocks for each signing partner. None of the memos purported to state any cause for the action being taken.

Once all three memos had been signed as indicated above, Evers confronted Tinkers, showed him the originals of the three memos, gave him copies, and told him that he had been removed as managing partner and expelled from the partnership.

A. Flabbergasted and outraged, Tinkers stormed back to his office, slammed the door and yelled, "I'll show those [expletive deleted]. I had the right to be confronted by my accusers, and I'm still the managing partner." As if to prove those assertions, Tinkers picked up the phone and called a computer leasing company. For the past several months, Tinkers had been negotiating with the company to lease new computers for the firm. The leasing company's latest counteroffer was on Tinkers' desk. When the company's representative got on the line, Tinkers identified himself, stated, "we accept your latest offer," and signed the lease on behalf of the firm. Assuming that Tinkers had previously intended to have the firm accept the company's offer and still believed the acceptance to be in the firm's best interest, did Tinkers' action bind the Tinkers, Evers and Chance firm? Explain. [Do not consider whether Tinkers' action bound any successor partnership.]

B. An hour later Tinkers received, via messenger, a letter from the firm's landlord giving the firm notice that the floor above the firm's current location had become available to lease. Under the firm's lease, the firm had a first option to lease that floor, whenever that floor became available. The lease required the landlord to give the firm written notice and allowed the firm 14 days from receipt of the notice to exercise the option. Thinking to himself, "They want to play dirty, I'll show them," Tinkers shredded the notice from the landlord and never mentioned its contents to any other partner. Did Tinkers' receipt of the notice trigger the 14 day exercise period? Explain.

C. Just after shredding the notice, Tinkers received a telephone call from the hiring partner at another firm. The hiring partner asked Tinkers' opinion of a new attorney who had applied for an associate position with the hiring partner's firm and who had worked the previous summer as a summer associate at Tinkers, Evers and Chance. Still overwhelmed by his anger, Tinkers characterized the new attorney as "smart as a whip and about as kind, just not the sort of person you can safely turn your back on." Assuming that characterization to be defamatory, is the defamation chargeable either to the Tinkers, Evers and Chance firm? Explain. [Do not consider whether the defamation is chargeable to any successor partnership.]

D. Six weeks after Tinkers' expulsion, the contingency case settled and the firm received a very large contingency fee. Does Tinkers have any claim for a greater "separation payout" on account of that contingency fee? Would it make any difference if, prior to Tinkers' expulsion, each of the three attorneys who masterminded Tinkers' expulsion said words to the following effect:

The case is all but settled, and we have to get him out before he gets any share of that settlement. He opposed the case. He bad-mouthed us for taking it, and he doesn't deserve to share in it.

Explain.

1. Businesses often "do business as" a name other than their true legal name. (Hence the term "dba".) "Assumed name" statutes typically require a business wishing to use an assumed name (i.e., a "dba") to file a form with a public official. The form discloses the true name of the owner of the business. In the case of a corporation that files for an assumed name, the corporation is the owner of the business, and the corporation's true name is as stated in the corporation's articles of incorporation.
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