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INSTRUCTIONS
1. Unless you have been instructed otherwise, this is a closed book, in-person, exam administered on
Canvas that counts as 85% of your overall Business Associations course grade. No materials other
than a blank notepad, which you may use in preparing your answers on Canvas, are permitted in
the exam room.
2. The exam consists of five questions that are equally weighted –twenty points each, for an exam
total of 100 points. All are essay questions for which there are no set word limits for answers. Write
as much or as little as you believe is necessary to fully answer the question, keeping in mind,
however, that “discuss” or “explain” mean that naked conclusions will not suffice.
3. Unless instructed otherwise, you have three hours to complete the exam. Manage your time
accordingly. Based on estimated 30 minutes per question you have ample time.
4. In your answers you may cite any of the cases discussed in class, as well as the Restatements, Model
and Uniform Acts, or statutes. If you do so, please make clear how the case or citation is part of
your analysis. A naked citation does little good.
5. It should not be the case, but if you believe you need additional facts to answer a question, state
exactly what those facts are and how they would affect your answer. However, do not assume away
an issue by assuming a fact not given in the question.
QUESTION ONE
Susan McClary (“McClary”) is a licensed insurance salesperson in Ohio who has entered into
agreements with several insurance companies to offer and sell their insurance policies in Ohio, for which
she is paid commissions on sales. One of these insurance companies is Golden Rule Insurance Company
(“Golden Rule”). The agreement between McClary and Golden Rule, titled “Independent Producer
Agreement” (the “Agreement”) states clearly that McClary is an “independent contractor,” and not an
employee of Golden Rule. The Agreement provides that McClary is authorized to solicit individuals to
purchase Golden Rule insurance policies using Golden Rule advertising, promotional and informational
brochures, or such materials that are approved in advance by Golden Rule, and that she will be paid
commissions on sales as provided in the Agreement. The Agreement contains these further provisions:
1. McClary must conduct her sales activity in accordance with written guidelines
provided by Golden Rule, and that she is prohibited from engaging in sales
activity outside the guidelines or not approved in advance by Golden Rule.
2. McClary must submit applications for insurance on forms supplied by Golden
Rule by individuals she successfully solicits, and she is to collect the initial
premium payment for any Golden Rule policy to be submitted with the
application for any policy she sells.
3. McClary shall ensure the accuracy of all applications for insurance she submits.
4. McClary must maintain confidentiality of all customer information obtained by
her for applications, and she must also maintain confidentiality of the terms of her
Agreement with Golden Rule.
McClary solicited Malcolm Denny (“Denny”) to purchase health insurance. McClary presented
suitable insurance products offered by several insurance companies for his consideration, including
insurance policies offered by Golden Rule. In conversations with Denny, he told McClary that he has a
preexisting medical condition. Subsequently, he decided to purchase the Golden Rule policy. Although he
had previously told McClary about his preexisting medical condition, McClary inadvertently failed to
note the condition on the application for Denny’s insurance she submitted to Golden Rule. Golden Rule
issued the policy to Denny, but subsequently refused to pay a claim under it after learning that Denny had
a preexisting medical condition that was not disclosed on his application for insurance.
Denny is now suing Golden Rule for breach of contract –for failing to pay his valid claim.
Denny’s lawyer says that his client disclosed the preexisting medical condition to Golden Rule by
disclosing it to McClary, who was, he says, Golden Rule’s agent. Considering just the “Independent
Producer Agreement” was there an agency relationship between McClary and Golden Rule?
MODEL ANSWER: QUESTION ONE
Yes. The Independent Producer Agreement creates an agency relationship regardless of its
“independent contractor” statement.
Although the agreement between McClary and Golden Rule states that McClary is an
independent contractor, based on the facts the Agreement does satisfy a basic element of an agency
relationship in that Golden Rule has manifested its assent to McClary that she shall act on Golden
Rule’s behalf, and she has manifested her assent to so act. McClary will solicit purchasers for
Golden Rule insurance products as provided in the agreement and be paid on sales. The key
consideration for the relationship, however, is whether McClary not only acts on behalf of Golden
Rule but is subject to Golden Rule’s control. An independent contractor is not controlled by a
principal and is not subject to a principal’s right to control the person in performing whatever task
or conduct is the subject of the relationship.
The question then is whether the provisions in the Independent Producer Agreement
imposing requirements or obligations on McClary in her performance amount to control, and
create an actual agency relationship rather than McClary being an independent contractor. Of the
provisions stated, the first –that Mary must conduct her sales activity in accordance with written
guidelines, and that she is prohibited from engaging in activity outside the guidelines or not
approved in advance by Golden Rule—is critical in answering the question. This is direct control in
the conduct of her activities, stated in terms that she “must” act accordingly, and that she is
“prohibited” from acting otherwise. The other three provisions are not significant in terms of
control. Two are ministerial kinds of things: Use Golden Rule forms for Golden Rule business she
solicits (but she solicits other business for other companies), and ensure accuracy of applications she
submits. The third provision, to maintain confidentiality, is also not a direct control on the manner
in which McClary actually carries on her sales activities. The control described in provision one is
quite different and real.
Golden Rule has tight control over the way McClary is to perform. Regardless of what the
agreement says about McClary being an independent contractor, the control in fact exercised, or
which Golden Rule has the right to exercise, over McClary’s sales activities makes this an agency
relationship.
QUESTION TWO
Good Dairy, Inc. (“Good Dairy”) is a Delaware corporation that manufactures and sells dairy
products. Good Dairy has long promoted its commitment to purchasing milk from dairy farmers who
pledge not to administer hormones to their cows. Indeed, the company has run advertising campaigns over
the years emphasizing its “clean and pure” hormone-free milk supply. Good Dairy has been recognized as
a leader in the “all natural” dairy products industry. Last month, after reviewing reports of certain
scientific research obtained by one of the board members, and hearing from farmers who treat cows with
hormones, Good Dairy’s board of directors concluded that there really is no difference between milk from
cows that are given hormones and milk from cows that are not. Board members did not speak with any
Good Dairy customers, or with any of their dairy farmer suppliers who do not use hormones. Nor did they
request and review any other available published research on the subject, which included research by
several noted scientists contrary to what the board reviewed. What board members knew was that Milk
from cows treated with hormones is less expensive and using it would boost the company’s profit
margins. Accordingly, the board decided that the company would begin purchasing milk from farmers
who administer hormones to their cows.
The decision to purchase milk from cows treated with hormones has caused a firestorm of
negative publicity for Good Dairy. Longstanding customers have launched a boycott of Good Dairy
products, and in general the company has come under heavy criticism by consumer groups. This has all
led to a severe drop in sales. Now, a shareholder has commenced a derivative action in Delaware
Chancery Court against the Good Dairy directors. The shareholder plaintiff alleges that in making the
decision to authorize milk purchases from cows treated with hormones the directors breached their
fiduciary duties.
Discuss what “fiduciary duty(s)” can or should be the basis for the shareholder action, and what, if any,
defense the directors have against the claims.
MODEL ANSWER: QUESTION TWO
The focus here is on the Good Dairy directors’ decision to begin purchasing milk from dairy
farmers who administer hormones to their cows. Generally speaking, directors of a Delaware
corporation have two main fiduciary duties: the duty of care; and the duty of loyalty. As a “triad”
of fiduciary duties, the duty of “good faith” is also recognized. The duty of good faith says generally
that a director must not act with a conscious disregard of his or her responsibilities, or be
intentionally derelict or deliberately indifferent in the face of a duty to act. The duty of care and the
duty of loyalty are more clearly defined.
In this question the first consideration is the fiduciary duty of care. In making the decision
to buy milk from hormone treated cows the directors were bound to sufficiently inform themselves
and consider all relevant information reasonably available to them. The duty of care applies to the
process by which they make the decision. To have the benefit of the business judgment rule, and to
prevail against a shareholder action like the one brought here, directors must honestly believe that
they are acting in the best interests of the corporation, and to support that belief they must be
sufficiently informed. The Delaware Supreme Court made that abundantly clear in the Van
Gorkam case, and statutes like the Model Business Corporation Act are just as clear that directors
must be informed to an extent that they take action reasonably believed to be in the best interests of
the corporation. In this case the shareholder plaintiff can argue that the board members did not
have or seek out information that was reasonably available to them that contradicted what
information and research that they reviewed. The directors, on the other hand, will argue that they
did have and review sufficient information to support their belief, and that they honestly believed
the decision was in the best interest of the business of the company based on that information. In
light of the reaction to the Board’s decision from customers and others, the shareholder will argue
that the directors could not have been sufficiently informed, but the issue will be whether they had
a rational basis for their decision.
The fiduciary duty of loyalty will not be involved here. But it is likely that the shareholder
plaintiff will argue that in addition to breaching the fiduciary duty of care the Good Dairy directors
breached their duty of good faith. The allegation could be made on the argument that the directors
consciously ignored the company’s history and established reputation as a leader in “all natural”
dairy products, and actually acted to destroy it, ignoring their customers and established suppliers
in the process. Alleged breach of the duty of good faith can be based on alleged conscious disregard
of responsibilities or deliberate indifference in the face of some duty to act for the protection of the
company’s business and stature as demonstrated by the results of the board decision. But the
Board’s decision will be evaluated under the business judgment rule at the time it was made, and
the directors will defend on that basis.
QUESTION THREE
Same facts as in Question Two. Now suppose that Good Dairy has included in its Articles of
Incorporation a provision consistent with § 102(b)(7) of the Delaware General Corporation Law,
eliminating personal liability of directors for monetary damages for breach of fiduciary duty. Good
Dairy’s lawyers will ask the court to dismiss the case based on this provision in the Articles. Assuming
the plaintiff has asserted violations of the fiduciary duty(s) you discussed above, what ruling by the court
is likely on the motion to dismiss? Explain.
QUESTION THREE: MODEL ANSWER
Knowing that Good Dairy has the permitted DGCL § 102(b)7) exculpatory provision in its
Articles of Incorporation the plaintiff’s assertion of a breach of the duty of good faith is important.
The 102(b)(7)-based provision exculpates directors from liability for damages based on a breach of
the duty of care, but not for liability for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law. The central issue in the Good Dairy, Inc
problem is the directors breach of the duty of care in making the decision to buy milk from
hormone treated cows. The court will dismiss the duty of care claim. It will not, however, dismiss a
duty of good faith claim. It would also not dismiss a claim of breach of the duty of loyalty. Section
102(b)(7) provides expressly that it does not eliminate or limit the liability of a director for breach
of the duty of loyalty but that claim is not likely asserted where the only issue is a Board business
decision involving no conflict of interest or personal advantage.
QUESTION FOUR
Largo, Inc. is a private company with about 100 shareholders, incorporated in a state that has
adopted the Model Business Corporation Act (2016). Nancy Harris is one of Largo’s seven directors.
Charley Chief is also a director and is the Chief Executive Officer of Largo. Largo has outgrown its office
space and Chief has been searching for a new building to lease. After narrowing the choices down to four
possible buildings in which Largo would lease new space, the Chief brought the matter to the Board of
Directors for discussion. At the board meeting Nancy made an argument in favor of one of the potential
lessors –Regal Properties, Inc. Nancy told the board: “I know they are most expensive of the four, but
Regal has an outstanding reputation and the location perfect for us.” Some of the other board members
commented how they thought Nancy’s argument was quite convincing.
Nancy did not disclose that she owns 25% of the stock of Regal, and that she receives 25% of the
profits of Regal. Chief and the other board members were not aware of Nancy’s connection to Regal.
Nancy said nothing more at the meeting. All of the directors, including Nancy, proceeded to vote in favor
of entering into a lease with Regal for the new space. Chief proceeded to sign a new long-term lease with
Regal on behalf of Largo, Inc., and the deal was done, at a substantially higher cost for Largo than any of
the alternative buildings. One of the Largo directors, Wilson, is a friend of the leasing manager of one of
those other buildings who said to Wilson in a chance meeting: “Sweet deal you guys did for Nancy Harris
on the Regal lease. How much does she get from Regal anyway?” Wilson said: “I don’t know what you
are talking about.”
Did Nancy Harris breach any duty(s) and/or standards of conduct she owes as a director of Largo
regarding the Regal transaction? Explain.
QUESTION FOUR: MODEL ANSWER
Yes. By reason of a conflict of interest, Nancy breached her duty of loyalty as a director of
Largo. She also breached the statutory duty of a director to disclose information to fellow members
of the Board that would affect their decision-making.
The Board’s decision to enter into a lease with Regal Properties, Inc. involved a conflicted
director, Nancy. In this situation Nancy had a personal interest in the transaction. She had a motive
of personal advantage by reason of her undisclosed 25% ownership in Regal. She was actively
involved in the decision, arguing for it and voting in favor of it. It is also given that the lease
approved by the Board carried a substantially higher cost for the company than any of the
alternative buildings being considered, which at least suggests in addition to everything else the new
lease was, or may be, unfair to the company.
As a director Nancy owes a duty of loyalty that is violated by her conflict of interest. The
duty of loyalty owed by a director is very clear in these circumstances. Nancy could not exercise
independent judgment on the lease decision because of her own financial interest in the transaction.
As a 25% owner of Regal she would benefit directly by her share of profits of Regal resulting from
the lease with Largo. It could only be seen as affecting her personal interest contrary to the best
interest of the corporation. Even if she would argue that it really is a “perfect” location and that the
comparatively higher cost is justified, and the transaction was fair, that does nothing to change the
fact that she violated her duty of loyalty by not disclosing her personal financial interest and
allowing the disinterested board members to make the decision being fully aware of her interest.
It is also true under the Model Business Corporation Act that, apart from the general duty
of loyalty not to act with a conflict of interest or to secure personal gain, Nancy had the statutory
obligation to disclose to her fellow board members information not known to them that is material
to their decision-making. She argued to the board in favor of the lease with Regal, but she withheld
the information about her personal involvement. This information would have affected their
decision-making.
QUESTION FIVE
Midland Interiors, Inc. (“Midland”) is a carpet installer and is a creditor of Window Treatment
and Carpet, Inc. (“Window Treatment”), a corporation formed to install carpets, window shades and
blinds. Shawn Benson was the sole shareholder, director, president and employee of Window Treatment.
Window Treatment hired Midland to install carpet on a number of jobs, but then failed to pay Midland for
the work. Window Treatment went out of business, leaving unpaid debts.
Window Treatment was properly formed as a corporation with the assistance of an accountant
(although it had failed to pay certain fees and state taxes). Benson always signed contracts and documents
“Window Treatment & Carpet, Inc.” But from the start it was shaky. It never owned any assets, although
it did maintain a corporate checking account. It did not hold corporate meetings of any kind or keep
minutes of them. The company books and records consisted of the corporate checkbook, From the
beginning Window Treatment was losing money and was unable to generate new business. It was
undercapitalized, and it remained undercapitalized. Expenses always exceeded its revenues to the extent it
was always insolvent – unable to pay bills as they came due. It had no insurance, and basically, no
economic worth from the beginning. While Window Treatment was in business, Benson used company
funds to pay personal expenses, make payments to his wife instead of him taking a salary, and to
contribute to an individual retirement account.
Midland is suing Benson personally for what Window Treatment owes –looking to “pierce the
corporate veil.” What factors do courts generally consider when deciding to pierce the corporate veil, and
what result in this case, where Benson maintains that he never disregarded his corporate status?
QUESTION FIVE: MODEL ANSWER
Generally speaking, piercing the corporate veil can happen when a court finds a unity of
interest between a shareholder and the entity such that the entity –the corporation—lacks a
separate personality. Often courts look at unity of interest in terms of “alter ego,” concluding that
the corporation is simply the alter ego, or extension, of the shareholder. Factors considered by
courts in veil piercing situations include:
(a) Failure to observe corporate “formalities.” These formalities are procedures
required by law or are contained in the corporation’s articles and by-laws.
Important formalities include actually adopting articles. They also include
shareholder meetings; directors’ meetings; appointing officers; keeping meeting
minutes and records of corporate activities; keeping separate financial books and
records; and keeping corporate property separate from the shareholder(s).
Disregard of corporate formalities indicates that the corporation is merely the
instrument of the individual and for the individual’s benefit.
(b) Undercapitalization. The shareholder(s)’ failure to provide sufficient
capitalization for the corporation to undertake its intended business activities.
Capitalization means the amount contributed at the time of formation of the
corporation and undercapitalization in practical terms means that the
corporation is set up from the beginning to fail. in that it will not, or it is at least
very unlikely, that it will be able to carry on its business.
(c) Commingling of assets and funds. This is evidence of misuse of corporate assets
that should be separately accounted for and maintained. Commingling means
using corporate funds for personal expenses with no proper accounting records
and supporting documentation.
(d) Recognition of limited liability would sanction a fraud or promote injustice to
third parties resulting from misuse of the corporate form. In the Sea Land case
the court made the point that even with all the factors like disregard of formalities
present it still must be shown that honoring the separate corporate existence
would cause injustice or inequity, or constitute fraud. The corporate entity must
be misused to promote injustice.
In the situation presented in the Question some of these elements are present. It is given that
Midland was undercapitalized and remained so, to the extent it was always insolvent –unable to pay
bills as they came due. Also, corporate formalities were disregarded, although Benson did always
sign contracts and documents evidencing the corporate form, and maintains that he never
disregarded corporate status. He maintained a “corporate checking account,” evidencing basic
separation of assets. The description of using funds to pay personal expenses, making payments to
his wife in lieu of taking a salary, making contributions to an IRA and losing money from the outset
and being unable to generate new business do not indicate conduct so out of the ordinary for a
single shareholder corporation. A failing business from the outset does not suggest that the business
was established using the corporate form to defraud creditors, or that recognizing limited liability
would promote injustice.
Courts do not approach piercing the corporate veil lightly. All things considered, there is a
reasonable chance that a court would not pierce the corporate veil. [Note: After applying the
factors, this question can be answered either way. The key is recognizing and applying the factors,
coupled with the admonition that courts are cautious about piercing the veil too easily.)
OUT OF CLASS TIME EXPECTATION
American Bar Association Standard 310 requires each law school to ensure that students in
upper level courses spend approximately 170 minutes per credit hour per week on their classes. This
means that students in this course should expect to spend approximately two hours on reading and
preparation for each hour of class.
Class Times:
Tuesday, Thursday 2:50 P.M. – 4:40 P.M. (10 minute break)
Room:
TBA
Office Hours:
Monday, Tuesday, Thursday 10:00 A.M. – 12:00 P.M, or by appointment
Grading Criteria:
Class attendance required. There will be a mid-term open book examination
taken remotely via Canvas that will account for 15% of the final grade, in
addition to a three hour final in-class closed book examination.
Required Texts:
Stephen M. Bainbridge, Business Associations: Cases and Materials on Agency,
Partnerships, LLCs, and Corporations (Foundation Press 11th Ed 2021)
Bainbridge, 2022 Statutes and Rules (Foundation Press)
Canvas Platform:
Canvas will be utilized in this course in several ways including Modules
containing PowerPoint slide decks that may or may not be used in person
in class and are considered part of assigned reading.
Class Recording:
Classes will be recorded using the Law School Echo 360 System. No other
class recording is permitted.
8/30
I. Introduction to Business Associations
A. Introductory Principles
B. Legal Framework
Skim: Statute Supplement Contents
Restatement of the Law (Second) Agency, Excerpts (ALI 1958)
Restatement of the Law (Third) Agency, Excerpts (ALI 2006)
Uniform Partnership Act (1914)
Uniform Partnership Act (1997)
Uniform Limited Liability Company Act (1997, as amended 2013)
Model Business Corporation Act (2016)
Delaware General Corporation Law
II. Agency Law and Agency Relationships
A. What Is an Agency Relationship; How Is It Formed; and Who Is an Agent?
Text: 1 – 13
Restatement (Second) §§ 1, 13
Restatement (Third) §§1.01, 1.02, 1.03, 1.04
Gorton v. Doty
Gay Jenson Farms Co. v. Cargill, Inc.
2
9/1, 6
B. Principal Liability to Third Parties in Contract
Text: 13 – 44
Attribution of Liability and the “PAT Triangle
Agent’s Authority
Restatement (Third) §§ 2.01, 2.02 – Actual Authority
Restatement (Third) §§2.03, 3.03 – Apparent Authority
Mill Street Church of Christ v. Hogam
Ackerman v. Sobol Family Partnership, LLP
Liability of Undisclosed Principal
Restatement (Third) § 2.06
Restatement (Second) § 4(3)
Watteau v. Fenwick
Ratification of Agency
Restatement (Third) Chapter 4 [Supp. pp. 18-20]
Botticello v. Stefanovicz
Agency by Estoppel
Restatement (Third) § 2.05
Hoddeson v. Koos Bros.
Agent’s Liability on the Contract
Atlantic Salman A/S v. Curran
Restatement (Third) §§ 6.04 6.10
9/8, 13
C. Liability of Principal to Third Parties In Tort
Text: 45 – 82
Servant/Employees Versus Independent Contractor
Restatement (Second) §§ 2(2), 2(3)
Restatement (Third) §§ 2.04, 7.03, 7.04, 7.05, 7.07
Humble Oil & Refining Co. v. Martin
Hoover v. Sun Oil Company
Murphy v. Holiday Inns, Inc.
Vandemark v. McDonalds Corp. (Note, Text pp. 56-57)
Tort Liability and Apparent Agency
Miller v. McDonald’s Corp.
Respondeat Superior: Torts of Agent Committed Within the Scope of
Employment
Restatement (Second) §§ 228, 229
Restatement (Third) § 7.07
Ira S. Bushey & Sons, Inc. v. United States
Clover v. Snowbird Ski Resort (Note, pp. 67-68)
3
Manning v. Grimsley
Arguello v. Conoco, Inc.
Liability for Torts of Independent Contractors
Restatement (Second) § 2(3)
Majestic Realty Associates, Inc. v. Toti Contracting Co.
9/15
D. Fiduciary Obligations of Agents
Text: 82 – 92
Restatement (Third) §§ 8.01, 8.02, 8.03, 8.04, 8.05, 8.06, 8.08, 8.09, 8.10, 8.11
Reading v. Regem
Rash v. J.V. Intermediate, Ltd.
Duties During and After Termination of Agency
Town & Country House & Home Service, Inc. v. Newbery
E. The Principal’s Duties to An Agent
Restatement (Third) §§ 8.14, 8.15
F. Termination of the Agency Relationship
Restatement (Third) Footnote, Supp. Page 17
9/20
III. General Partnerships
A. What Is a General Partnership? Who Are Partners?
Text: 93 – 111
UPA (1997) §§ 102(11), 202(c)
UPA (1914) §§ 6(1), 7(4)
Fenwick v. Unemployment Compensation Commission
Martin v. Peyton
Southex Exhibitions, Inc. v. Rhode Island Builders Association, Inc.
Partnership by Estoppel
Young v. Jones
Inadvertent Partnership
B. Formation of a General Partnership
Partnership Formation
UPA (1914) § 7
UPA (1997) §§ 202
Governing Law
UPA § 104
Associated state law filing or procedural formalities
The Partnership Agreement
UPA (1997) §§ 105, 106, 107
C. Being a Partnership
Partnership as a Legal Entity
4
UPA (1997) § 201
Actions By and Against Partnership
UPA (1997) § 307
Partnership Property
UPA §§ 203, 204
Partners’ Joint and Several Liability
UPA (1914) § 15
UPA (1997) § 306
Partners as Agents
UPA (1997) §301
U

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