Business Law Study Set 14

Business

Quiz 43 :

Law for Small Business

Quiz 43 :

Law for Small Business

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CASE PROBLEM WITH SAMPLE ANSWER: Fraud. Emil Cerullo owned a small diagnostic imaging center in Dallas, Texas. With one of the doctors who used the center, he formed a partnership to develop ambulatory centers for lap band surgeries for weight-loss patients. Cerullo and his partner approached Peter Gottlieb about building and managing a center, and he promised that he would do so. Gottlieb subsequently set up the center independently, without Cerullo and his partner, and Cerullo sued. A jury found that Gottlieb had committed fraud and awarded actual and punitive damages. Should this verdict stand on appeal Explain why or why not. [ Cerullo v. Gottlieb, 309 S.W.3d 160 (Tex. App. 2010)]
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Fraud:
In the case Cerullo v. Gottlieb, 309 S.W.3d 160 (Tex.App. 2010) the jury awarded actual and punitive damages against Gottlieb. The Court of Appeals reversed the judgment on the verdict and rendered judgment that Cerullo take nothing on its fraud claim against Gottlieb.
The Court of Appeals stated that there was legally insufficient evidence to support the jury verdict as to fraud. Further, they found that no evidence that Gottlieb intended to break his promises upon which New You relied in exchange for divulging business concepts and referring patients and physicians. The court of appeals applied the no evidence standard of review.
The Court stated that circumstantial evidence could not be considered under the circumstances or from the jury's assessment of credibility. Cerullo did not demonstrate a clear admission of intent.
Therefore, the Court of Appeals reversed the jury's findings.

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Should corporate lawyers who become aware that someone at the client corporation may have violated securities laws report their suspicions only to persons within the corporation, or should they report their concerns to the SEC Explain.
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Violations and Confidentiality:
According to the Sarbanes-Oxley Act of 2002 , attorneys are required to report any material violations of securities laws to the corporation's highest authority. In 2003, the Securities and Exchange Commission (SEC) permitted attorneys to disclose confidential information to the SEC without their corporate client's consent in certain circumstances.
These changes in confidentiality were amended into the American Bar Association's ethics rules; however, many states have not amended their ethics rules to reflect the amended changes in the American Bar Association or Sarbanes-Oxley Act.

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Trade Secrets Hudson Muma, Inc., was a small, family-owned insurance agency. Andrew Muma, the son of the founder, was an officer, shareholder, and director of the company. Andrew left the company and began working as a commissioned salesman for another insurance agency, Wolf-Hulbert Co. Hudson Muma filed a suit against Wolf-Hulbert, alleging that Andrew had taken customer information that was a trade secret. Wolf-Hulbert argued that it had no knowledge of this, and the trial court granted a motion dismissing the action. Hudson Muma appealed. How should the appellate court decide Why [ Hudson Muma, Inc. v. Wolf-Hulbert Co., ___ N.W.2d ___ (Mich.App. 2010)]
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Trade Secrets:
In the case Hudson Muma, Inc. v. Wolf-Hubert Co., ___ N.W.2d ___ (Mich.App. 2010) the trial court granted a motion dismissing the action. The Court of Appeals affirmed.
The Court stated that there were no factual questions surrounding Hudson's claims, and supported the trial court's decision to grant a direct verdict in favor of Wolf.
The Court noted that a violation the Uniform Trade Secrets Act pursuant to MCL 445.1902(b)(i), occurs when someone knowingly acquires a trade secret by improper means. However, no evidence presented that Wolf-Hulbert knew or should have known that the items were taken through improper means.
The Court further stated that there was no indication that any information improperly taken by Mr. Muma was given to Wolf-Hulbert. Wolf-Hulbert's knowledge, or lack thereof, of Mr. Muma's actions was crucial to a decision, as a defendant is required under statute to know or had reason to know that information was acquired under one of the three circumstances cited in MCL 445.1902(b)(ii)(B).
Therefore, to the extent Wolf received a benefit from or at the expense of Hudson; its retention of the same was not inequitable or unjust.

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QUESTION WITH SAMPLE ANSWER: Limited Liability Companies. Amy forms Best Properties (BP), LLC, to own real estate as a long-term investment. BP acquires a 40,000-square-foot warehouse for $500,000, with the financing arranged for, and guaranteed by, Amy. Later, Carl and Dave become BP members. They sign a member's agreement, which states, "Amy shall own a 50 percent interest in the capital, profits, and losses of BP and shall have 50 percent of the voting rights. Carl and Dave, collectively, shall own a 50 percent interest in the capital, profits, and losses of BP and shall have 50 percent of the voting rights." BP's sole asset is the warehouse. When relations among the members become strained, Amy executes a deed transferring the warehouse to Excel, LLC, for $500,000. Excel has two members-Amy, with a 60 percent interest, and Carl, with 40 percent. Neither Amy nor Carl discusses the warehouse transfer with Dave, but Amy mails him a check that purports to represent his 25 percent interest in the warehouse. Dave files a suit against Amy and Carl, alleging that the transfer was unfair. On what basis might the court rule in favor of the defendants Why might the court decide in Dave's favor Explain.
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Does the outcome in this case illustrate the advantages or the disadvantages of the LLC form of business organization Explain.
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Officer Liability South Shore Imaging, Inc., agreed to lease a Konica laser imager machine from Key Equipment Finance. The lease contained a guaranty section to be signed by the officers. The officers returned the lease with their signatures but added their corporate titles in handwriting. Key then demanded that the document be re-executed without the reference to corporate capacities. The officers did so. Key later sought to recover from the individual officers for breach of the lease. Should the court hold them liable Explain. [ Key Equipment Finance v. South Shore Imaging, Inc., 69 A.D.3d 805, 893 N.Y.S.2d 574 (2010)]
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Limited Partnerships Wall Street Technology Partners, LP, was a limited partnership, operating under a 2000 limited partnership agreement. Limited partners made capital contributions on joining the partnership. Under the agreement, they were obligated to make additional contributions as needed, when requested by the general Partner. In December 2002, a capital call was sent to the limited partners, but they failed to respond. Wall Street bought an action to compel them to pay. They claimed that they had been promised that such contributions would not be required. Should they be compelled to pay Why or why not [ Wall Street Technology Partners, LP, v. Kanders , ___ A.2d ___ (Conn.Super. 2010)]
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Limited Liability Companies PT China, LLC, joined with PT Korea, LLC, to form PT Holdings. Harrison Wang and Michael Kim, representing the two entities, were to be the managers. The agreements prohibited them from engaging in related outside business endeavors. PT China subsequently filed a suit against PT Korea and Kim, alleging that Kim had misappropriated funds. The defendants counterclaimed, alleging that Wang had breached his fiduciary duties of loyalty to the entity by usurping business opportunities. Wang moved to dismiss the counterclaim, contending that any allegation that he had violated his fiduciary duties was precluded by Kim's claim against him for breach of contract under the LLC's operating agreement. How should the court rule Why [PT China, LLC v. PT Korea, LLC, ___ A.2d ___ (Del.Ch. 2010)]
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A QUESTION OF ETHICS: Taxation of LLCs. Sean McNamee was the owner of an accounting firm, W. F. McNamee Co., LLC (WFM), which he founded and formed in Connecticut as a limited liability company (LLC). For federal tax purposes, an LLC can elect to be treated as a corporation or as a sole proprietorship by checking the appropriate box on a certain tax form. A corporation's income is subject to double taxation-the corporation is taxed directly, and its shareholders are taxed on dividends paid to them from the income-but its owners normally are not liable if the firm does not pay its taxes. A sole proprietorship is taxed only once-the owner pays personal income tax on the business's income-but its owner is liable if the tax is not paid. In 2000, an LLC with a single owner that did not elect corporate treatment was taxed as a sole proprietorship. McNamee did not elect to have WFM treated as a corporation. During the last six months of 2000 and all of 2001, WFM employed an average of six persons but did not pay any payroll taxes. The unpaid total was $64,736.18. WFM went out of business in 2002. The U.S. Department of the Treasury, through the Internal Revenue Service (IRS), assessed the amount of the unpaid tax against McNamee personally. [ McNamee v. Department of the Treasury, 488 F.3d 100 (2d Cir. 2007)] (a) McNamee objected to the IRS's attempt to collect the tax from him, pointing to Connecticut statutes under which the members of an LLC are not personally liable for its debts. He argued that the IRS's action was "in direct conflict with the right of an LLC member." How would the IRS likely respond to this objection Do you agree with McNamee or the IRS Why What might McNamee have done to avoid this dispute (b) In October 2005, the IRS proposed to amend the check-the-box regulation to relieve the owner of a single-member LLC from the possibility of personal liability for the LLC's payroll tax liability. Does this proposal show that the check-the-box regulation under which McNamee was personally assessed with the amount of the unpaid taxes was "unethical" or "wrong" Why or why not
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Do you agree that when a corporation is approaching insolvency, the directors' fiduciary obligations should extend to the corporation's creditors as well as to the shareholders
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Business Forms George Overton has plans for establishing a new business with Elena Costanza. They will both be managers, and each will take an annual salary of $50,000. The company will have other expenses of $175,000. They expect to take in $375,000 in the first year of operation and share the profits equally. George and Elena have not yet decided whether to incorporate the new business or run it as a partnership. What are the tax differences between the two approaches
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Limited Liability Companies Coco Investments, LLC, and other investors participated in a condominium conversion project to be managed by Zamir Manager River Terrace, LLC. The participants entered into a new LLC agreement for the project. The investors subsequently complained that Zamir had failed to disclose its plans for dramatic changes involving higher than expected construction costs and delays, had failed to provide financial information, and had restructured loans in a manner that allowed Zamir representatives to avoid personal liability. The investors sued Zamir on various grounds, including breach of contract and breach of fiduciary duty. Zamir moved for summary judgment. How should the court rule Explain. [ Coco Investments, LLC v. Zamir Manager River Terace, LLC, 26 Misc.3d 1231 (N.Y.Sup. 2010)]
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Owner Liability Raynor Manufacturing Co. sold garage doors and relatedí products. In 1983, it sold products to Kelly and Janet Stoner, doing business as Raynor Door Co. of Topeka. The Stoners, operating as a partnership, personally guaranteed payment of any balance to Raynor Manufacturing. The Stoners and Raynor Manufacturing continued doing business for more than a decade. In August 1992, the Stoners incorporated their partnership. In 2005, Raynor Manufacturing made a demand for a past due amount exceeding $223,000. It also sued the Stoners for failing to pay under their personal guaranty. The Stoners argued that their personal guaranty did not survive incorporation, but the district court found for Raynor Manufacturing. On appeal, what should be the result Why [ Raynor Manufacturing Co. v. Raynor Door Co. 225 P.3d 780 (2010)]
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When a company's executives offer opinions about the firm's financial status and future business prospects through blogs, Twitter, and other Internet forums, the SEC can hold the company liable for violating securities laws. Is this fair to investors who want to hear the straight scoop from the firm's executives What arguments can you make in favor of this restriction What arguments can you make against it
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Three decades ago, corporations and corporate directors were rarely prosecuted for crimes, and penalties for corporate crimes were relatively light. Today, this is no longer true. Under the corporate sentencing guidelines and the Sarbanes-Oxley Act, corporate wrongdoers can receive substantial penalties. Do these developments mean that corporations are committing more crimes today than in the past Will stricter laws be effective in curbing corporate criminal activity How can a company avoid liability for crimes committed by its employees
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What might Mixon and the other members of Iberia Surgical have done to avoid the litigation and its ultimate result in this case
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