Business Law Chapter 39 Homework Peterson Therefore Personally Liable Both Contracts Because

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CHAPTER 39

CORPORATE FORMATION AND FINANCING

ANSWERS TO CRITICAL THINKING QUESTIONS

IN THE FEATURE

DIGITAL UPDATE—CRITICAL THINKING

Is thinking about committing a crime illegal? In general, the obvious answer is, no. Thinking

about murdering one’s spouse, so long as no positive actions are taken toward that goal, does

not constitute a crime. Thus, using preventive analytics to predict malfeasance on the part of

GLOBAL INSIGHT—CRITICAL THINKING

The law underlying the case against Microsoft is the Electronic Communications Privacy

Act, which was enacted three years before the invention of the World Wide Web. Should

that law still apply today? Why or why not? Of course, Microsoft argues that this law has to

be amended by Congress for the government to obtain, via a search warrant, electronic

communications stored abroad.

Further, Microsoft has argued that U.S. search warrants have not been able to reach

overseas just as U.S. residents would not want foreign courts to be able to search domestic

2 UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 39.1—CRITICAL THINKING

LEGAL ENVIRONMENT

Why would the appellate court permit Polyflow to get away with not paying for delivered

and presumably merchantable goods? Drake filed a suit in a Pennsylvania state court to

collect the unpaid amount of its contract with Polyflow. The court entered a judgment in Drake’s

favor. A state intermediate appellate court reversed this judgment, however, permitting Polyflow

to get away with withholding payment for Drake’s delivered and presumably merchantable

CASE 39.2—LEGAL REASONING QUESTIONS

1. How do the purposes of the CIA support each other? The CIA (New jersey’s state

Charitable Immunity Act) serves two primary purposes. First, immunity preserves a charity’s

assets. Second, immunity recognizes that a beneficiary of the services of a charitable

2. Can a person be a direct beneficiary of a nonprofit’s good works even though the

person is on the nonprofit’s premises under the direction of a third party? Explain. Yes,

a plaintiff can be the beneficiary of a nonprofit entity’s good works even though his or her

presence on the premises results from a relationship with another person or entity, and not the

nonprofit itself.

For example, a member of an organization that receives charitable benefits from a local

church could be on the church grounds at the behest of the member’s organization to receive a

3. Suppose that the Museum had not been hosting an educational panel in its auditorium

but instead had rented the facility to an organization for a sales conference. Would the

result have been different? Discuss. The result in the Pantano case might or might not have

been different if the Museum had not been hosting a panel discussion in its auditorium but had

rented the facility to an organization for a sales conference. The outcome would depend on the

purpose of the organization and its conference, and the amount of the fee. If, for example, the

Other cases in which charitable, religious, and educational institutions have been held

immune under the CIA have included the following circumstances.

1. The plaintiff fell while attending a concert at a hall owned by a university and

rented to a non-profit chamber symphony. The university was immune.

3. A member of a Greek Orthodox parish that paid a nominal fee for the use of a

4. A church was immune from liability for the injuries suffered by a non-parishioner

guest at a wedding held on the church’s grounds.

CASE 39.3—CRITICAL THINKING

ETHICAL

The failure of Teal Properties and Jerry Teal to reimburse the tenant, Dog House, for the

repair costs placed the tenant in a dire financial situation. Does this consequence make

the landlord’s conduct unethical? Discuss. A breach of contract is a failure to keep a

promise. This is clearly unethical. In this case, the contract included a promise by the landlord—

Jerry and Teal Properties—to reimburse its tenant—Dog House—for the funds expended to

repair the flood damage to the leased premises. Neither Jerry nor Teal Properties repaid Dog

House.

4 UNIT EIGHT: BUSINESS ORGANIZATIONS

LEGAL ENVIRONMENT

The trial court also concluded, and the appellate court affirmed, that Teal Properties had

breached its contract with Dog House. What was the contract? How was it breached?

The contract included the terms of the lease and Jerry’s promise to reimburse Dog House for

the cost to repair the flood damage to the leased property. Under the lease, the landlord

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Theory

2A. Articles

Sharp is likely to be personally liable based on piercing the corporate veil due to ignoring the

corporate form. Technical details in the articles of incorporation alone would not be likely to

3A. Credit

4A. Classification

The corporation was formed and operated in Georgia, so it is a domestic corporation. It is

owned by one person, so it is private; its stock is not traded, so it is also a close corporation.

CHAPTER 39: CORPORATE FORMATION AND FINANCING 5

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

The sole shareholder of an S corporation should never be able to avoid liability for

the torts of her or his employees. Perhaps it makes sense to allow individuals to use business

organization forms that allow them to pass through profits to their personal tax returns, but it

ANSWERS TO ISSUE SPOTTERS

AT THE END OF THE CHAPTER

1A. Northwest Brands, Inc., is a small business incorporated in Minnesota. Its one

class of stock is owned by twelve members of a single family. Ordinarily, corporate

income is taxed at the corporate and shareholder levels. Is there a way for Northwest

Brands to avoid this double taxation? Explain your answer. Yes. Small businesses that

meet certain requirements can qualify as S corporations, created specifically to permit small

businesses to avoid double taxation. The six requirements of an S corporation are (1) the firm

2A. The incorporators of Consumer Investments, Inc., want their new corporation to

have the authority to transact nearly all conceivable types of business. Can they grant

this authority to their firm? If so, how? If not, why not? Broad authority to conduct business

6 UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWERS TO BUSINESS SCENARIOS

AT THE END OF THE CHAPTER

39-1A. Preincorporation

(a) As a general rule, a promoter is personally liable for all pre-incorporation contracts

made by the promoter. The basic theory behind such liability is that the promoter cannot be an

agent for a nonexistent principal (a corporation not yet formed). It is immaterial whether the

(b) Incorporation in and of itself does not make the newly formed corporation liable for

pre-incorporation contracts. Until the newly formed corporation assumes Peterson’s contracts

39-2A. Ultra vires doctrine

It could be argued that Oya exceeded her authority when she cosigned the note on behalf of the

corporation. The board of directors of a corporation delegates the authority to transact all

ANSWERS TO BUSINESS CASE PROBLEMS

AT THE END OF THE CHAPTER

39-3A. SPOTLIGHT ON SMART INVENTIONS—Piercing the corporate veil

A corporation can be liable under the doctrine of respondeat superior for the torts of its agents

or employees committed while they are acting within the scope of their employment. In this

case, Nokes was acting on behalf of Smart Inventions, which would thus be liable for Nokes’s

39–4A. Piercing the corporate veil

The appellate reversed the trial court’s opinion as it relates to the piercing of the corporate veil.

The appellate court pointed out that genuine issues of material fact existed as to whether

Smith’s corporation abused the corporate form by disregarding it and using it to undermine

39-5A. Close corporations

Yes, Pourgol’s acts may likely have constituted misconduct. In this problem, Burnett charged

Pourgol with the submission of incorrect plans to obtain the building permit, misrepresentation of

the extent of the renovations, and a failure to fix the house. The submission of incorrect plans

might arguably have been a mistake and the misrepresentation a misstatement in good faith.

39–6A. Piercing the corporate veil

The court may hold Greenblatt, Jahelka, and Nichols personally liable by piercing the corporate

veil. Loop was essentially a sham that existed only for the benefit of its owners. Given that its

three shareholders invested only $1,000, Loop was comically undercapitalized. Moreover, after

39–7A . BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Piercing the corporate veil

Yes, there are sufficient grounds in the facts of this problem to support piercing the corporate

veil and holding Kappeler personally liable to Snapp. First, in a case in which a plaintiff seeks to

pierce a corporate veil, there must be a fraud or other injustice to be remedied. In that situation,

the factors that a court will consider in determining whether to pierce the corporate veil include

39–8A. Torts

Yes, R&K can be held liable for the torts of its employees. A corporation is liable for the torts

committed by its agents or officers within the course and scope of their employment. The

doctrine of respondeat superior applies to corporations in the same way as it does to other

agency relationships.

39–9A. A QUESTION OF ETHICS—Piercing the corporate veil

(a) Yes, assuming that 2406–12’s allegations are true, there are sufficient grounds to

pierce Alianza LLC’s corporate veil. When the owners of a corporation, or as in this case, an

LLC, use the entity to perpetrate a fraud, circumvent the law, or in some other way accomplish

(b) If the parties to this dispute in this case were small, close corporations, the court

might more readily pierce the business entity’s veil to hold its owner personally liable for the

sought-after rent.

The potential for the assets of a business entity to be used for personal benefit is especially

great in a close corporation. In such a corporation, the separate status of the corporate entity

and the shareholders (often family-members) must be carefully preserved.

In a close corporation or a similarly sized limited liability company, the business entity is

owned by only a few persons. Certain practices can create a risk for the owners by intertwining

their interests with the interests of the entity. For example, the commingling of business and

10 UNIT EIGHT: BUSINESS ORGANIZATIONS

ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS

AT THE END OF THE CHAPTER

39–10A. Corporate versus LLC form of business

(a) Forms of business entities such as corporations have long histories, the law is

generally predictable and well known, and the agreements and other forms required are fairly

standard. This is not true with limited liability companies (LLCs) and other more recent types of

(b) An LLC of five members could be member-managed or manager-managed. The

most important factor is what the state requires with respect to the management of the firm.

Other factors that should be taken into consideration include whether the members want all of