Final Examination Business Associations Professor Michele Benedetto Fall 2007

1. You have three (3) hours for this examination. 2. This is a closed book examination. 3. This examination has 12 (twelve) pages. Please check to ensure you have all 12 pages. 4. This examination contains two (2) parts: multiple choice questions and essay questions. The examination will be worth a total of 1000 (one thousand) points.

Part I consists of twenty (20) multiple-choice questions. Each multiple choice question is worth twenty (20) points. Part I will be worth a total of 400 (four hundred) points. Correct multiple choice answers are to be marked on the separate ParSCORE test form using pen or pencil and following the instructions on that form. If you change your answer, place a clear X through the wrong answer and mark the correct answer. A machine will score the exam and any ambiguities will be counted as a wrong answer. Part II consists of two essay questions. Essay Question #1 is worth a total of 250 (two hundred fifty) points, and Essay Question #2 is worth a total of 350 (three hundred fifty) points. You should allot your time according to the weight given to each essay. I strongly encourage you to spend at least 15 minutes outlining each answer before writing. Read the questions carefully to ensure you address all the issues identified. Write on every other line and every other page to permit instructor comments.

5. Write your student exam number on your exam envelope. Put your student exam # at the top of this page, each page of questions, each blue book, and the ParSCORE TEST FORM. Do not use your name, student ID number or Social Security Number on any exam materials. 6. At the conclusion of the exam, return ALL test materials, including blue books, the ParSCORE answer sheet, scratch paper, and this exam packet to the envelope and submit it to the proctor. Do not seal the envelope. Students who do not return all exam materials at the end of the exam may not be graded.

GOOD LUCK!

PART II: ESSAY QUESTIONS

(Question 1: 250 points)

Johnny and Derek played on the same baseball team in high school. At their 10year high school reunion, Johnny proposed that he and Derek go into business together selling pizza near the local baseball stadium. Derek knows that Johnny is a wealthy man, and agrees to open a pizza restaurant with Johnny. Deciding not to consult a lawyer because they are old friends, the two men sign a written agreement to be business partners for five years. They agree to split all profits and losses equally between the two of them, and they agree to manage the business equally. Johnny and Derek open Pinstripe Pizza, and establish relationships with pizza dough suppliers and other restaurant suppliers. The business is a success. For the next four years, they split all profits between the two of them, and they cooperate well together to manage the business. One day, Johnny gets into a heated argument with Alex, the pizza dough supplier. Johnny believes that Alex is overcharging them for inferior quality pizza dough, and Johnny advises Derek that he personally will no longer be responsible for any pizza dough purchased from Alex. Derek believes that Johnny is overreacting, and he continues to purchase pizza dough regularly from Alex for Pinstripe Pizza for the next two months. In the meantime, Derek is approached by Joe, the landlord of the pizza restaurants building. Joe is moving to Los Angeles, and he asks whether Derek would be interested in purchasing land next to the pizza restaurant for development. Derek is very interested in purchasing this valuable land, but he no longer wants to be Johnnys partner. Derek signs the real estate purchase papers with Joe, and says nothing to Johnny. Derek plans to begin developing the property into a bowling alley immediately after his 5-year business agreement with Johnny is finished. Business at Pinstripe Pizza begins to decline when the local baseball team fails to make the playoffs for the fourth year in a row. Faced with mounting debt, Johnny and Derek decide to dissolve the business. The business has $10,000 remaining upon dissolution, but owes $15,000 to Alex for pizza dough delivered in the last two months. Johnny refuses to pay any money to Alex, since he informed Derek two months earlier of his intent not to be personally responsible for pizza dough purchased from Alex. During the dissolution proceedings, Johnny learns that Derek has already purchased the land for development next door. Johnny believes that Pinstripe Pizza would be successful if it reopened as part of a bowling alley. Johnny sues Derek, seeking to be included in the development deal. Derek comes to your law firm and asks for advice. Assume you are working in a jurisdiction that has adopted neither the UPA nor applicable caselaw, but is willing to consider such authorities.

1. Is Johnny personally liable for the debt to Alex? Why or why not? 2. Will Johnnys lawsuit against Derek be successful? Why or why not?

(Question 2: 350 points)

Mary Ellen is an attorney in New York City. She serves on the board of directors of Morgan Lynch, a publicly traded company on the New York Stock Exchange. Mary Ellen owns $5,000 worth of Morgan Lynch stock, and her friend Robert owns $10,000 worth of shares. Mary Ellen is a renowned expert in real estate transactions. In 2005, she spent an entire month researching subprime mortgages. Mary Ellen concluded that such mortgages were an excellent business investment, and persuaded Morgans board of directors to invest heavily in subprime mortgages in 2005. As a result of its mortgage investments, Morgan Lynch made a substantial profit for two years. Unfortunately, the subprime mortgage market began to decline in spring 2007. In April 2007, Mary Ellen realized that Morgan Lynch had overinvested in subprime mortgages to the extent that the company would lose a significant amount of money if the market declined. She also realized that the mortgage market was showing signs of impending collapse. Because the other members of the board were not real estate experts, they did not recognize the markets warning signs. Mary Ellen was afraid to tell other board members her realizations, because she was the one who originally encouraged Morgan Lynch to invest in subprime mortgages. Concerned about her personal investments, Mary Ellen emailed her broker and told him to sell all of her Morgan Lynch shares. The broker immediately sold her shares for a profit of $1,000. Mary Ellen then called her friend Robert in California. She told him I think I made a mistake in telling Morgan Lynch to invest in subprime mortgages. The company is now depending on those investments, and it will go under if the mortgage market collapses. After their phone conversation, Robert called his broker in New York and ordered him to sell all of his Morgan Lynch shares. Robert earned a $2,000 profit on the sale. Thrilled with his profit, Robert sent flowers to thank Mary Ellen. The subprime mortgage market collapsed in August, 2007. As Mary Ellen anticipated, Morgan Lynchs business was significantly impacted. In the last three months, Morgan Lynch has lost $3 billion and the stock price has lost 40% of its value. Angry shareholders are planning to sue the entire board of directors. 1. Has Mary Ellen violated any duties to the shareholders? Could she be held personally liable? 2. Has Mary Ellen violated any federal securities laws? Discuss. 3. What, if any, liability does Robert face?

END OF EXAM