Business Associations I (Fall 2008) Final Exam Instructions

Following are the exam instructions for the Business Associations I final exam tomorrow. Please note, you will have these for the exam, but I wanted to provide them early in case you want to read them first.

INSTRUCTIONS FOR FINAL EXAMINATION

This is an open-book examination. You may use any class-related, non-electronic materials you wish to bring, and you may take the exam on a laptop if you have complied with the UND School of Law’s requirements. Other than the hard copies of materials you bring for the exam, you may not use a computer (other than for taking the exam), the Internet, or other electronic resources (unless otherwise authorized by the Dean’s office for specific accommodations). Thus, you must print out and bring to the exam anything you wish to access during the exam. The work on this exam must be solely your own. You must turn in this exam along with any scratch paper at the end of the exam.

You will have three hours to complete the entire examination, which consists of 20 multiple-choice questions, to be answered on the provided Scantron form, and 2 essay questions (with subsections), which are to be answered in a blue book or typed on a laptop using the approved software. The estimated time for each section is noted clearly in the exam. This time should be a benchmark, you may spend as much or as little time on each section as you wish. However, the point allocations correspond directly to the time allocations. Please answer every question. You are better served answering every question, with a little less on each part, than missing an entire question.

For the multiple-choice questions, please indicate your response clearly on the Scantron form. Specifying more than one option is automatically incorrect. If you have questions or concerns, pick the best answer, then explain briefly on your exam (and not the Scantron) why you think there is more than one correct answer (or there are no correct answers) and move on.

If you are using a laptop to answer the essay questions, you still must log in to the program at the beginning of the exam period. (If you are handwriting the exam, you should not have your laptop in the exam room.) Please turn in the entire exam, including your scratch paper. Remember that the multiple choice responses must be put on the Scantron to receive credit. This exam is double-sided; both sides matter!

Please use only your exam number -- do not use your name, student ID number or Social Security Number on any exam materials.

This final exam is to be your work, and your work alone. University and UND School of Law policies apply, including, but not limited to the School of Law’s Academic Dishonesty and Misconduct Policy. By turning in this exam, you certify that the exam was completed by you, without the aid of any materials not expressly authorized.

This exam covers the material we discussed in class. Relax (as best you can) and use the information from class to guide you to the correct answers. Read carefully to ensure you know what the questions are asking, and look for the differences between possible options so you can pick the best response. Again, if you see any problems or inconsistencies, note them briefly and move on.

Commercial Outlines and End of Question Period

The Business Associations I exam is tomorrow, December 4, 2008, at 1 p.m. As such, I will not respond to any more questions regarding this exam or course material. This close to the exam time, I cannot equitably respond to and distribute any of my responses to all students.

Also, I received a question regarding commercial outlines. This test is open book, and I placed no restriction on commercial outlines earlier, so you may bring one if you wish. However, I strongly recommend against it. The exam was created from the text book and my class materials. A commercial outline can be useful to help clarify your thoughts or class notes, but on its own is of little value. Again, as noted before, don't let your access to materials impede your ability to take the exam. You should look up few, if any, items during the exam. Otherwise, you run the risk of running out of time. A quick look may be helpful -- trying to learn the material during the exam will cause problems.

I will post the exam instructions for your review shortly. They will also, of course, be provided with the exam, but they will be provided early if you wish to review them before the exam time.

LLC Laws

Question:

In the class review we discussed ND law and Delaware law for LLCs. Will we be expected to compare them literally, or is there another context or limited subject application?

Answer:

That was in the context of Class 22 -- LLC Expulsion. The basic point of what I wanted you to know is that the Delaware LLC law is very hands-off (i.e., has few default rules), so Delaware LLCs should have extensive planning and detailed operating agreements. Of course, planning and good operating agreements should be part of any LLC formation, but because Delaware doesn't fill in the blanks as much, more rules must be specified. The ULLCA (and North Dakota law) have more detailed rules for dissolution than Delaware, which means it is easier to use "off-the-rack."

Sales of an LLC Interest

Question: What happens if an LLC member sells his or her interest?

Answer: LLC default rules regarding transfers of interest operate similar to those for a partnership. A member of an LLC possesses a membership interest, which usually includes only a right to distributions (i.e., an economic interest). A membership interest is deemed personal property and may be transferred freely to nonmembers or to other LLC members. This membership interest usually does not include any management rights. As such, if a member assigns or sells a membership interest, that purchaser typically receives only the right to the assigning member's distributional interest (i.e., share of profits). See ULLCA § 501. Persons who receive a membership interest are not able to participate as voting members or managers unless the operating specifically provides for such a right or they are admitted as new members by unanimous vote (or other vote provided in the operating agreement). Article 5 of the ULLCA §§ 501-503, which can be found on pages 462-63 in your text, explains the default rules for this process in more detail. Of course, the operating agreement can modify these rules.

Additional Questions

Here is a little background for the questions that follow:

Restatement (Second) of Agency § 186. General Rule

An undisclosed principal is bound by contracts and conveyances made on his account by an agent acting within his authority, except that the principal is not bound by a contract which is under seal or which is negotiable, or upon a contract which excludes him.

Restatement (Second) of Agency § 321: Principal Partially Disclosed

Unless otherwise agreed, a person purporting to make a contract with another for a partially disclosed principal is a party to the contract.

Question: Can you tell me how Restatement (Second) of Agency § 186 and Restatement (Second) of Agency § 321 do not contradict one another, or if they do contradict one another in some situations, how do I decide which rule applies?

Answer: Section 186 simply says that the principal is bound if he has an agent acting on his authority; § 321 says a partially disclosed principal means both the agent and the principal are bound if the agent acted within his authority, unless otherwise agreed by the third party. An agent is also bound by his actions under §186, but that is clear because the third party was not told of any principal. If the agent had alluded to a principal, it would move to the partially disclosed section.

Question: It seems that the court in Atlantic Salmon could have applied § 186 and held that even though Curran did not disclose his principal, because he was an agent acting within his authority, the corporate entity principal should have been liable. Did it have something to do with the contract stating a fictitious corporation's name instead of the real corporation's name? - Thus being a contract that excludes the real principal.

Answer: Holding the corporation liable was not the issue -- there was no money in the corporation to recover. There was no question the corporation was liable, but the plaintiffs wanted to hold Curran personally liable.

Question: In undisclosed principal situations, does the wronged third party have the right to elect whether they want to hold either the agent or the undisclosed principal liable?

Answer: Generally, yes. If the agent was acting within his authority in making the contract, both the agent and the principal are liable.

When Can Partnerships Continue?

The following question was posed by one of your classmates:

Question:

When can partners continue the partnership after dissolution and when must they wind up?

Answer:

The simple answer is that under traditional partnership rules and the 1914 version of the Uniform Partnership Act (UPA), barring one exception described below, any partner leaving triggers dissolution. The Note in your textbook at pages 259-60 captures the essence of how this operates. Under the 1997 version of the UPA, the revised UPA (RUPA), provides that the partnership will often continue if a partner wrongfully dissolves (at least, as long as the remaining partners wish to do so.)

Here's a little more detail: Under the UPA, partners leaving a partnership at any time trigger dissolution, whether rightful or wrongful, except for UPA § 38(2), which permits the partners who did not wrongfully dissolve to continue in the partnership for an agreed term as long as all remaining partners agree and post a bond guaranteeing payment to the wrongfully dissolving partner at the end of the term. Note that a partnership can also continue on with the agreement of all the partners by buying the partnership property, although this is technically a successor partnership continuing the business. However, the issues really revolve around the liability of the departing partner, and not the viability or validity of a future partnership made up of some of the partners.

In contrast, RUPA § 601 permits "dissociation" prior to dissolution. Dissociation is when a partner ceases to be associated with the partnership in the carrying on (i.e, not winding up) of the business. Dissolution and winding up may or may not follow. Under RUPA, there are options beyond dissolution and winding up to keep the current partnership structure. RUPA § 801 provides for UPA-like dissolution of an at-will or post-term partnership and the dissociating partner is liable only for obligations “appropriate for winding up the partnership business” or acts that would otherwise have been binding as to parties who are not on notice of the dissolution. However, if the dissociation does not lead to a dissolution and winding up, § 701 is the relevant provision, and the departing partner is entitled only to a buyout of his or her interest in the partnership. See § 603(a). If a partner wrongfully dissociates under RUPA, the partnership would otherwise continue, and the remaining partners may agree to continue the partnership if they wish to do so. See RUPA § 802(b). For our purposes, know that RUPA default rules provide greater latitude for continuing the partnership and may provide a wrongfully departing partner a right to a buyout, instead of dissolution and liquidation of the partnership.

Read the above in conjunction with the cases we discussed and your class notes, and hopefully this will help.

Proper Does Not Make it Appropriate

As long as the partnership agreement permits, you can oust your partners in a variety of ways, many of which are not especially pleasant. As an example, check out this article one of your classmates brought to my attention:

Michael D. Hausfeld returned to his office after a meeting to find a notice on his chair telling him he'd been voted out as chairman of the Cohen Milstein Hausfeld & Toll law firm in Washington.

Ouch.

Drafting Exercise

During the last class, I provided a handout with some basic examples of contract clauses that highlighted drafting considerations related to the class discussion. Click here for the handout.

Next Class: Drafting Exercise

There are no materials you need for our next class. During our next class, we will review some basic points of drafting and conduct an in-class exercise related to drafting contracts.

As such, there is nothing you need to do to prepare for class. Instead, please take some time to review prior course work (or catch up on your readings, if needed).

See you in class.

C corps & S corps

Prof. Fershee--

During the last class period you discussed "C corps" and "S corps." I know this question is likely irrelevant for this semester, but for those of us without any "business background" could you give a general definition/description of these types of corporations and some of their advantages/disadvantages?

Professor's Response:

We'll talk about this some more in class, but the basic difference is that a C corporation is taxed as an entity, and then distributions to shareholders (dividends) are taxed separately. If the corporation elects to be taxed as an S Corp, the taxation is the same as partnerships, LLCs, and sole proprietorships, which are taxed as "pass through" entities. This means the owners are taxed directly on their ownership shares, rather than paying taxes as an entity. (Note that LLCs and S Corps must file a form indicating ownership shares.)

The main benefits of a C Corps include certain employee benefit programs and carry forward of losses. S Corps can be taxed as a pass though, but can be restrictive in terms of who can own the entity.

LLC as a Partner/Shareholder in another entity

Professor Fershee-

In Elf v. Jaffari, a Corporation became a member of an LLC. I was wondering, can this happen the other way around?

Can an LLC become a partner in an Limited Partnership or a shareholder in a Corporation?

Can an LLC become a member in another LLC?

Professor's Response:

For the first question, an LLC can own stock in a corporation, which would allow it to vote for members of the board. There is some nuance here in how everything is effected, but yes, an LLC can be an owner of a corporation.

For the second question, yes, an LLC can become a partner in an LP or own shares in a corporation. Click here for an interesting example of an LP with an LLC as the managing General Partner.

Finally, yes, and LLC can be a member of another LLC.

Tax Implications

Professor Fershee,
In class today you mentioned there are negative tax consequences in switching from a GP to a LLP (as well as switching between the others)-without going into too much detail, where/how are the tax ramifications felt? Who drives these relatively new partnerships, is it the IRS or does the IRS merely react to trends in business?
Thanks.

Professor's Response:
Actually, (at least in the jurisdictions I have seen) there are no tax consequences to converting from a general partnership to an LLP (with the caveat that there could be some limited circumstances or state anomalies). The major consequences are when a corporation converts to an entity under the partnership structure (e.g., LP, LLP, LLC). This can be deemed a liquidation and have major tax consequences.

As for the other part of your question, we'll talk about it in more detail today. The IRS does not drive entity formation or rules, but IRS decisions certainly impact entity choices. When a new entity type is created, the IRS determines how it will treat the new entity -- that impacts if and how people will use such options.

partnership?

I have noticed that some partnerships are called (example's only): Fershee L.L.P. (limited liability partnership) while others are called Fershee L.P. (limited partnership). Is there a difference between an L.L.P and an L.P. or do they mean the same thing?

thanks

Tom

Professor's Response:

Great question, and certainly appropriate for today's discussion. In fact, today's class (October 27, 2008) will cover this specific issue. The short answer is no, they are not the same. Stay tuned . . . .

question

#1 Do the default rules that we have discussed in class (need all partners to agree to change original agreement, majority of partners can decide day to day issues if agreement doesn't appoint someone or already address, etc..) apply to an L.L.P as well. All the cases we have analyzed appear to be something other than an L.L.P arrangement.

#2 If a partner wants out of a partnership that is profitable, how do the partners normally settle on the value of "good will". It seems like it could be a highly litigated area and I haven't read any cases that address this.

Thanks

Tom

PROFESSOR'S RESPONSE

#1 The default rules we are talking about are for general partnerships, not Limited Liability Partnerships (LLPs). LLPs can only be created by agreement and filing with the state. As such, they have different rules, although they are similar in many instances). We will discuss LLPs periodically (I may note some specific differences and similarities), but overall, this course is about partnerships generally. LLPs are more advanced than we have time for in this course. We will discuss some LLP-related issues when we get to our LLC section later in this course.

#2 We will discuss goodwill a little more in the near future. It is often point of contention, but note that valuation of almost anything is contested when partners get to the litigation stage. More on this soon.

UPA (1914) v. UPA (1997)

For our purposes in BA I, what is the significance of the original UPA created in 1914? Do lawyers and courts look to the earliest UPA primarily for comparative analysis as persuasive authority? Is that also the primary reason for our use of the UPA (1914)?

Professor's Response:

Good question. The 1914 version of the UPA was adopted by all states, in some form, except Louisiana. As such, it is the basis for most partnership law. The National Conference of Commissioners on Uniform State Laws (NCCUSL) notes that the law was revised in 1994 and 1997 (there was also a 1996 Uniform Act). As such, the NCCUSL now refers to the UPA by the year of the version being discussed. However, many people (including me from time to time) still call any post-1914 version the Revised UPA or "RUPA."

The 1997 version was adopted by approximately 34 states plus others jurisdictions (e.g., Washington, D.C., and Puerto Rico), according to the NCCUSL. Thus, depending on the state of the partnership, you could be working in a UPA state or a RUPA state. FYI -- North Dakota and Minnesota are UPA (1997) states.

More on Bailouts

In one sense, this issue is not directly part of our course, but it has relevance to just about everything we do. And, as we saw in today's cases, the mindset that can lead to risky lending is nothing new. As lawyers, consumers, and Americans, the current financial crisis matters, no matter what Congress does with regard to the bailout.

Here are a couple good articles (plus one of mine), with varying view points.

Commentary: Bankruptcy, not bailout, is the right answer
Source: www.cnn.com
Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

Commentary: The Paulson Plan Will Make Money For Taxpayers
Source: online.wsj.com
In 1992, hedge-fund manager George Soros made $1 billion betting against the British pound. In 2007, John Paulson's Credit Opportunities fund correctly bet against subprime mortgages, clearing $15 billion for the year and $3.7 billion for him. Warren Buffett is now hoping to make big money on Goldman Sachs. But these are small-time deals . . . .

Commentary: Bailouts Should Have Strings
Source: www.lansingstatejournal.com
Recent government-arranged bailouts for Bear Stearns and the lenders Freddie Mac and Fannie Mae have raised questions as to who's next? The debate has focused on Detroit, primarily on General Motors.

This one is just amusing:
Shouts & Murmurs: Too Big to Fail
Before you throw this letter into the proverbial round file, let’s be clear: this is the first time I have ever asked for a bailout from the Federal Reserve.

In Honor of Constitutional Law Day

Check out this Scavenger Hunt

International Agents

Following are a two recent articles discussing agents in the international context. Consider the issues presented and how you might advise the parties if they were your client seeking to do business in the United States. Think about what research you would need to do to provide appropriate advice.

India: Sub-Agent Concerns

Canada: Permanent Establishment Under Canada–United States Tax Convention


If you are so inclined, feel free to post comments on these articles, including research ideas or any related items of interest.

Overview of Partnership Issues

This post, written by the Deal Professor, Steven M. Davidoff, at the New York Times Deal Book Blog, provides a nice overview of some of the issues implicated by different types of business entities. Don't be overwhelmed by this -- there are a number of complicated concepts here. Absorb what you can, and if you are confused or lost, know that by the end of the semester, this will make a lot more sense.

Text Books

Following are the correct text books for BA1. The UND Bookstore has the correct texts, but some versions of my syllabus had the text from last year. I apologize for any confusion. The following are the correct texts:

1. William A. Klein, J. Mark Ramseyer, & Stephen M. Bainbridge, AGENCY,
PARTNERSHIPS, AND LIMITED LIABILITY ENTITIES: UNINCORPORATED BUSINESS ASSOCIATIONS (2d ed. 2006) (“KRB”)

2. Business Organization and Finance, William A. Klein & John C. Coffee, Jr., BUSINESS ORGANIZATION AND FINANCE (10th ed. 2004) (“K & C”)

Course Syllabus -- Fall 2008

Law 212: Business Associations I: Agency & Partnership (Fall 2008)
Prof. J. Fershee
Mon./Wed. 10:10 a.m. to 11:40 a.m., Room 8
Office Hours (rm 306): Monday, 1:00 p.m. to 2:00 p.m. or by appt.
e-mail: jfershee[@]law.und.edu; phone: 701.777.2261

Click here for full Syllabus