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					                     CALIFORNIA STATE UNIVERSITY, FULLERTON
                       COLLEGE OF BUSINESS AND ECONOMICS
                           DEPARTMENT OF MANAGEMENT
                        LAW FOR SMALL BUSINESS (MGMT 349)
                         FIRST EXAMINATION FOR FALL 2009
                           PROFESSOR CHARLES H. SMITH



NAME:          ___________________________________
DATE:          SEPTEMBER 28, 2009

        You will have one hour and 50 minutes to complete this exam, which is comprised of 30
multiple-choice questions (worth one point each) and two essay questions (worth 10 points
each). For this exam, use a Scantron Form No. 882-E for the multiple-choice questions. Paper is
provided with this exam for the essay questions. If you have any questions about any aspect of
this exam, please discreetly signal me. Good luck!

        1. Jasper sued the City of Long Beach (“Long Beach”) claiming a violation of his free
speech rights under the First Amendment of the United States Constitution. In his complaint,
Jasper alleged that a city police officer stopped Jasper in the middle of giving a speech in support
of his campaign for mayor. The officer claimed that Jasper was using "hate speech" during the
speech. In its motion to dismiss this case, Long Beach cited a California state statute that stated:
“„Hate speech‟ is prohibited in all political communications.” How should the court rule?

        A. The court should grant Long Beach‟s motion to dismiss because racial slurs are “hate
speech.”
        B. The court should grant Long Beach‟s motion to dismiss because the statute clearly
covers this sort of situation.
        C. The court should deny Long Beach‟s motion to dismiss because the definition of
“hate speech” is inherently unclear.
        D. The court should deny Long Beach‟s motion to dismiss because the First Amendment
preempts the conflicting statute.

       2. Which of the following would not create a statute?

       A.   Congress.
       B.   United States Supreme Court.
       C.   Orange County Board of Supervisors.
       D.   California Legislature.




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       3. Which of the following is a primary source of law?

       A. The case of Cable Connection, Inc. v. DIRECTV, 44 Cal.4th 1334 (2008).
       B. An article in this morning‟s Orange County Register regarding the conviction of
former Orange County Sheriff Mike Carona.
       C. A book entitled A Litigator’s Guide to the Effective Use of ADR in California.
       D. Commentaries about California Penal Code Section 187.

       4. Stare decisis requires:

       A.   Judges to apply the law equally to all who appear before them.
       B.   Judges to follow past court decisions when deciding a current lawsuit.
       C.   Lawyers to refrain from publicly commenting about a current lawsuit.
       D.   Lawyers to advocate for a modification or reversal of existing law.

       5. Which of the following is a purpose of a secondary source of law?

       A. To provide the “devil‟s advocate” view of the law.
       B. To provide weak positions as to the law.
       C. To provide guidance in areas of the law inadequately or not addressed by primary
sources of law.
       D. To provide greater support for primary sources of law when such support is deemed
necessary.

       6. Which of the following is an example of a statute?

       A. Section 10 of the Federal Arbitration Act.
       B. Commentaries about California Penal Code Section 187.
       C. A recent decision by the California Supreme Court interpreting Section 1856 of the
California Code of Civil Procedure.
       D. Any arbitration award.

       7. Which of the following is ordinarily not found in a case?

       A.   Statement of the issue(s).
       B.   The court‟s reasoning as to its ruling(s).
       C.   Description of the facts.
       D.   The loneliness of the long distance runner.

        Questions 8 through 10 are based on the following: Thayer, Ramirez and Brown
(collectively “the owners”) started a business which owned and operated a small restaurant in
Laguna Beach called “La Caliente Zapata” (“the restaurant”). Thayer contributed the vast
majority of money needed to get the business started as well as a liquor license. Ramirez
contributed his expertise as a chef as well as a “book of business” of customers who would be
willing to follow him from his former position as a chef at a popular Newport Beach restaurant
that had just closed. Brown contributed his ability to supervise the employees, and to handle

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administrative matters such as creating and keeping to a budget. The owners did not have
anything in writing but they agreed to put all of their efforts into the restaurant, to split the profits
equally, and to vote on all business decisions. After several months, the restaurant was starting
to become successful because of the owners‟ contributions and hard work. However, the
restaurant had incurred substantial debt in its own name. At the urging of their attorney, the
owners decided to form either a general partnership, limited partnership, or limited liability
partnership for the restaurant.

       8. Assume for the purposes of this question only that the owners decided to form a
general partnership. Which of the following is true with respect to their restaurant?

        A. All of the owners would be personally liable for any debt incurred by the restaurant.
        B. None of the owners would be personally liable for any debt incurred by the restaurant.
        C. Only Ramirez and Brown would be personally liable for any debt incurred by the
restaurant.
        D. The issue of personal liability is irrelevant because the business format of a general
partnership is not available to the restaurant.

        9. Assume for the purposes of this question only that the owners decided to form a
limited partnership. Which of the following is true with respect to their restaurant?

        A. All of the owners would be personally liable for any debt incurred by the restaurant.
        B. None of the owners would be personally liable for any debt incurred by the restaurant.
        C. Only Ramirez and Brown would be personally liable for any debt incurred by the
restaurant.
        D. The issue of personal liability is irrelevant because the business format of a limited
partnership is not available to the restaurant.

        10. Assume for the purposes of this question only that the owners decided to form a
limited liability partnership. Which of the following is true with respect to their restaurant?

         A. All of the owners would be personally liable for any debt incurred by the restaurant.
         B. None of the owners would be personally liable for any debt incurred by the restaurant.
         C. Only Ramirez and Brown would be personally liable for any debt incurred by the
restaurant.
         D. The issue of personal liability is irrelevant because the business format of a limited
liability partnership is not available to the restaurant.




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       11. Aguilar loaned $250,000.00 to a corporation in exchange for the corporation's
promise to transfer certain real estate to Aguilar within five years. After five years, the
corporation's income was $10 million per year. However, it failed to transfer the real estate to
Aguilar so she sued the corporation for breach of contract. Which of the following would be the
most appropriate judgment in this case?

        A. In favor of Aguilar in the amount of the fair market value of the real estate.
        B. In favor of Aguilar in an amount to be determined by dividing the fair market value of
the real estate into the total amount of money in the corporation's bank accounts at the time of
the loan.
        C. In favor of Aguilar in an amount to be determined by a "reasonable value" of her
investment.
        D. In favor of the corporation since only the shareholders can be liable for loans to a
corporation.

       12. Which of the following is not a reason why you should hire an attorney form a
corporation for your business?

          A. Attorney involvement is recommended because a corporation is a separate legal
entity.
        B. Attorney involvement should eliminate mistakes.
        C. Attorney involvement should make the attorney responsible if there are any problems
with the incorporation process.
        D. Attorney involvement could lead to legal advice about whether a corporation is the
best legal entity for your business.

        Questions 13 and 14 are based on the following: Monica, Ursula and Laurie formed a
partnership to own and operate a liquor store in Fullerton. The partnership agreement included
the following provisions:

                 “Expulsion from the partnership business. Any partner may be expelled
          from the partnership for good cause, such as violation of any law pertaining to the
          partnership business.”

                  “Separation payment and covenant not to compete. If any partner
          separates from the partnership business for any reason, she shall be entitled to
          payment by the remaining partners of a lump sum in an amount equal to 20% of
          the fair market value of the partnership at the time of separation. This payment
          will include any „goodwill‟ attached to the separated partner, who promises to not
          compete with the partnership business for a period of one year after separation.”

       On December 31, 2008, Monica was arrested by police for selling an alcoholic beverage
to a minor. On January 15, 2009, she pled guilty to this charge and paid a small fine. On
February 1, 2009, Ursula and Laurie notified Monica that she was expelled from the partnership
business. On September 11, 2009, Monica opened a new liquor store in Anaheim as a sole
proprietor. On September 15, 2009, Ursula and Laurie sued Monica for breach of the partnership

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agreement. They sought an injunction to stop Monica from owning and operating her new liquor
store. (Questions 13 and 14 are on the next page.)

       13. Was Monica properly expelled from the partnership with Ursula and Laurie?

       A. Yes, because selling an alcoholic beverage to a minor is highly unethical.
       B. Yes, because selling an alcoholic beverage to a minor violates a law pertaining to the
partnership business.
       C. No, because Ursula and Laurie waited over two weeks after Monica pled guilty to
expel her from the partnership.
       D. No, because the partnership received income whether or not the sale of an alcoholic
beverage to a minor was a crime.

      14. How should the court rule on the request by Ursula and Laurie for an injunction to
stop Monica from owning and operating her new liquor store?

         A. The request for an injunction should be granted because Monica opened a competing
business less than one year after separating from the partnership.
         B. The request for an injunction should be granted because Monica opened a competing
business that was also in Orange County.
         C. The request for an injunction should be denied because any covenant not to compete
is illegal in California.
         D. The request for an injunction should be denied because several months had passed
and Monica‟s new liquor store was in a different city.

       15. If a shareholder of a corporation loans money to the corporation, is the shareholder
allowed to charge interest on the loan?

       A.   Yes.
       B.   It depends on the prime rate as announced by the Federal Reserve.
       C.   Only if the corporation repays the principal first.
       D.   No.

        16. Emma formed a business to run a florist shop. Emma worked at the shop along with
three employees. When she started to make money, the three employees demanded a percentage
of the profits. Is Emma required to pay them a percentage of the profits?

       A.   Yes, because they are employees of the shop.
       B.   Yes, because this is sound business practice.
       C.   No, because Emma is a sole proprietor.
       D.   No, because employees have no right to compensation.

       Questions 17 and 18 are based on the following: Two lawyers named Razavi and
Khatibloo formed a law firm called Razavi & Khatibloo LLP. The firm as well as Razavi and
Khatibloo as individuals are defendants in two lawsuits. In the first lawsuit, the plaintiff alleges
that Razavi committed malpractice when she failed to properly calendar the statute of limitations

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for a personal injury claim by the plaintiff and this caused the plaintiff‟s personal injury
complaint to be dismissed. In the second lawsuit, the plaintiff alleges that Khatibloo signed a
contract on behalf of the firm to purchase a computer system but the firm breached the contract
by failing to pay for the computer system after it was delivered to the firm‟s offices.

       17. If the court decides that Razavi committed the alleged malpractice in the first
lawsuit, can judgment be entered against the firm, Razavi or Khatibloo?

          A.   Judgment can be entered against the firm, Razavi and Khatibloo.
          B.   Judgment can be entered against the firm and Razavi only.
          C.   Judgment can be entered against the firm only.
          D.   Judgment can be entered against Razavi only.

       18. If the court decides that the firm committed breach of contract in the second lawsuit,
can judgment be entered against the firm, Razavi or Khatibloo?

          A.   Judgment can be entered against the firm, Razavi and Khatibloo.
          B.   Judgment can be entered against the firm and Khatibloo only.
          C.   Judgment can be entered against the firm only.
          D.   Judgment can be entered against Khatibloo only.

        Questions 19 and 20 are based on the following: Miss Bossy Pants (a fifth grade teacher)
and her faithful companion, Mr. Know-It-All (a college professor), owned and operated a
business together which sold baby supplies. They called their business “An Association of
Superior Minds” but had never registered in any way with any government agency. Mr. Know-
It-All withdrew all of the money from the business‟ bank accounts and spent the money on wine,
women and song (but not on Miss Bossy Pants). At the time, the business owed $200,000.00 to
a supplier. The business rented its premises and owned personal property worth less than
$10,000.00. The supplier sued the business, Miss Bossy Pants and Mr. Know-It-All for the
$200,000.00 owed by the business to the supplier. At trial, Miss Bossy Pants and Mr. Know-It-
All claimed that judgment should be entered in their favor.

          19. How should the court rule as to Miss Bossy Pants?

          A. She should win since the business was a limited partnership.
          B. She should win since she gained no benefit from the money withdrawn by Mr. Know-
It-All.
          C. She should lose since the business was a general partnership.
          D. She should lose since the business was never registered with any government agency.

          20. How should the court rule as to Mr. Know-It-All?

          A.   He should win since the business was a limited partnership.
          B.   He should win since the business was never registered with any government agency.
          C.   He should lose since he was the only person to benefit from the money he withdrew.
          D.   He should lose since the business was a general partnership.

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       21. The articles of incorporation for a corporation are analogous to:

       A.   The evil that men do.
       B.   Any contract entered into by a limited liability partnership.
       C.   A limited liability company's articles of organization.
       D.   A statement by domestic stock corporation.

       22. Which of the following is true about a sole proprietorship?

       A. The owner must share control of the business with his or his investors.
       B. The owner will probably pay less in income taxes than the income taxes paid by a
corporation and its shareholder(s).
       C. The owner will have limited liability for contract obligations.
       D. The owner will may experience double taxation.

       23. Which of the following is true about a general partnership and a limited partnership?

       A.   All partners are actively involved in both types of partnerships.
       B.   No partners are actively involved in either type of partnership.
       C.   Both types of partnerships pay income taxes.
       D.   Neither type of partnership pays income taxes.

       24. What are the duties of a corporation‟s directors?

       A.   Day-to-day supervision of corporate employees.
       B.   Making all filings required by law.
       C.   Ownership of corporate stock.
       D.   Setting of corporate policy and direction.

       25. A corporation‟s board of directors is:

       A.   Appointed by the corporation‟s officers.
       B.   Elected by the corporation‟s employees.
       C.   Appointed by the California Secretary of State.
       D.   Elected by the corporation‟s shareholders.

        Questions 26 and 27 are based on the following: Russ and John want to form a business
for the purchase and sale of rock and roll memorabilia. Each man has an extensive knowledge of
rock and roll music, a substantial collection of rock and roll memorablia, and more than enough
money to fund the business for at least a year. Russ is an internet expert who has designed
dozens of websites for well-known bands such as Metallica and Iron Maiden. John has
considerable bookkeeping and retail sales experience. Both men anticipate spending at least 60
hours per week working at the business for the first year or so with help from a few part-time
employees. Their business will be operated from a retail site at a strip mall located at the corner
of Nutwood and State College in the City of Fullerton (John‟s father owns the strip mall). They

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plan to operate a website from the same location for the purposes of buying and selling
merchandise over the internet in addition to the retail site. Russ and John are unsure of which
business form they should use but have limited their choices to a partnership or a corporation.

       26. What would be the best reason for them to form a partnership?

       A.   Their contributions to the business would be roughly equal.
       B.   Their knowledge of the subject matter of the business would be roughly equal.
       C.   As a general rule, they would avoid double taxation.
       D.   As a general rule, they would avoid personal liability.

       27. What would be the best reason for them to form a corporation?

       A.   Their contributions to the business would be roughly equal.
       B.   Their knowledge of the subject matter of the business would be roughly equal.
       C.   As a general rule, they would avoid double taxation.
       D.   As a general rule, they would avoid personal liability.

       28. A corporation‟s officers are appointed or elected by:

       A.   The corporation‟s directors.
       B.   The corporation‟s shareholders.
       C.   The secretary of state.
       D.   The judge hearing a petition to appoint officers.

       29. A partnership agreement:

       A.   Should be in writing since it is generally required by state law.
       B.   Should be in writing since a written document can provide clarification.
       C.   Should not be in writing since it is generally not required by state law.
       D.   Should not be in writing since a written document will not provide clarification.

        30. Which of the following is an advantage of forming a limited liability company
instead of a corporation?

       A.   A limited liability company does not have the "double taxation" problem.
       B.   A limited liability company is an established type of business organization.
       C.   A corporation does not have the "double taxation" problem.
       D.   A corporation is an established type of business organization.




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        The first essay question is based on the following: Elise, Karina and Taylor decided to
form a partnership to own and operate a retail store devoted to selling pets and pet supplies.
Each partner owned one-third of the business but only Elise and Karina were actively involved in
the business. Both ladies worked full-time in the store. Also, Elise maintained the partnership's
books and records, while Karina dealt with outside vendors. Taylor's contribution was the store's
premises (he owned the mall in which the store was owned) though he regularly inspected the
store as part of monthly mall inspections. The partners had partnership meetings every three
months for the purposes of reviewing the past three months and planning for the upcoming three
months (and beyond). Over the past several months, Karina (on the partnership's behalf) entered
into two contracts that caused the partnership to lose money. The first contract was a contract to
repaint the store, which did not need repainting but Karina was persuaded after the painting
contractor secretly paid her a $5,000.00 "commission." The second contract involved the
acquisition of puppies from a "puppy farm" Karina had never heard of or seen before. Karina
believed the second contract was a "good deal" because the vendor showed her some pictures of
puppies. In reality, the puppy farm did not exist and the partnership received nothing despite
paying thousands of dollars. Karina was naturally embarrassed about both contracts and said
nothing to Elise and Taylor until the partnership and its partners were sued in separate lawsuits
with respect to both contracts.

        First essay question: Using the IRAC format1, discuss whether Karina violated the
following duties – (a) duty of disclosure to Elise and Taylor, (b) duty of care to the partnership
and (c) duty of loyalty to the partnership.




1
    As previously advised, the IRAC format is:
           1. State the Issue presented,
           2. State the Rule that applies to the issue presented,
           3. Analyze the facts that are relevant to the applicable rule and the issue presented, and
           4. State a Conclusion based on the analysis.
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        The second essay question is based on the following: Leykis and Stern each own 45% of
the stock in a corporation called Shock Jocks, Inc. Ten other shareholders each own 1% of the
remaining stock. Leykis is the CEO and Stern is the Secretary and Treasurer. The board of
directors is comprised of Leykis, Stern and their mutual friend, Bahbahbooey. Leykis and Stern
are actively involved in the business, but Bahbahbooey is not. Shock Jocks, Inc. has been in
existence for four years since the articles of incorporation were filed on May 25, 2005. It has
held annual meetings for the shareholders and the board of directors every year though no
written records of these meetings were kept. Its annual income has ranged from $12,000.00 to
over $500,000.00, but it has never filed any tax returns. Shock Jocks, Inc. did file a Statement by
Domestic Stock Corporation last year for the first time in its existence. Shock Jocks, Inc.
maintains books and records as to all of its financial and other dealings. It maintains one
corporate bank account which usually has a few hundred dollars on deposit. In order to meet
regular expenses such as payroll, Leykis and Stern loan enough money to the corporation to meet
the expense; every loan is documented in writing and repaid at the maximum legal rate of
interest over a time period of no more than one year. When Leykis and Stern travel on company
business, they use their personal vehicles or buy airline tickets with their personal credit cards.
They are reimbursed for these travel expenses upon presentation of receipts to the corporation‟s
accountant. Leykis was recently traveling by car from the corporate offices to a meeting at a
client‟s office when he ran a red light and hit a pedestrian, who filed a negligence lawsuit against
Shock Jocks, Inc., Leykis, Stern and the other ten shareholders. Assume that Leykis is (a) 100%
at fault for the accident, (b) a judgment would be entered against him and the corporation, and
(c) Leykis was acting in the course and scope of the corporation‟s business at the time of the
accident.

       Second essay question: Using the IRAC format, discuss whether judgment should also
be entered against (a) Stern and/or (b) the other ten shareholders.




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Additional paper provided for your responses to the essay questions:




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Additional paper provided for your responses to the essay questions:




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