Question

Questions 1-3 rely on the following facts:

Alex and Barb, friends since childhood have begun a newsletter for fans of their local music scene. The newsletter follows local bands, advertises shows, reviews new albums and provides other news. They’ve kept their day jobs, but spend much of their free time producing the newsletter which they create each week in the garage of the house they rent together. They distribute it for free but earn a profit through sales of advertising, and they often at least break even and even turn a small profit.   Their dreams are much bigger and they plan for the newsletter to eventually be their sole employment. The newsletter was originally alex’s idea, and he put the first several issues out while he was a college student. When he told Barb about it, she asked if she could help and said “just tell me what to do.” They bought printing equipment to do a more professional job, deciding between themselves to each pay for half of the equipment cost. They both worked on the actual production of each issue, both made sales of advertising space and made deliveries of the newsletter. They do not keep formal books except for the checkbook of the joint checking account where Alex deposits checks from advertising clients and pays firm expenses. They have never written down any sort of agreement between themselves.

Barb’s uncle Charlie, who is wealthy, was sad to hear that money was tight and made two offers to the pair. He offered Barb and Alex $5000 to cover expenses for their business. When Barb insisted the offer was too generous, he said “hey, don’t worry kid, pay it back when you can, I’m proud of you.” Second, he introduced Barb and Alex to a friend named Paul, who runs a local nightclub. Charlie gave Barb Paul’s business card and Alex and Barb were able to use Charlie’s introduction to land a lucrative advertising contract with the nightclub to advertise upcoming shows. As a down payment, Paul sent Alex and Barb a check for $1500.

However, for reasons that are unclear, Alex and Barb, shortly afterward stopped publishing the newsletter and absconded with Paul’s $1500 payment. Charlie being the only person left around, gets sued by Paul for breaching the contract.

1. Which of the following suggests that Alex and Barb formed a partnership?
   1. Evidence of sharing profits
   2. Capital contributions
   3. Evidence of sharing losses
   4. All of the above
   5. B and C only.
2. Given the informal way in which Alex and Barb formed their business, which would likely be the biggest surprise about the legal aspects of the business they had?
   1. Alex’s exposure to personal liability
   2. Barb’s exposure to personal liability
   3. Barb’s right to have an equal say in governing the company
   4. A and C are correct
   5. B and C are correct
3. Paul’s claim against Charlie will likely:
   1. Succeed because Charlie stated his intent to act as an agent for Alex and Barb.
   2. Succeed because Charlie is vicariously liable for the acts of Alex and Barb as someone who introduced them to a business contact.
   3. Fail because even though Charlie could be liable, there isn’t enough proof that Alex and Barb should owe the money.
   4. Fail because Charlie is not liable for the acts of Alex and Barb.

Answer 1

Which of the following suggests that Alex and Barb formed a partnership?

All of the above (D) is correct. The indication that they share profits and losses is that the proceeds are deposited into and expenses paid from a joint checking account. And Alex and Barb appear to have made capital contributions by paying for equipment together.

Given the informal way in which Alex and Barb formed their business, which would likely be the biggest surprise about the legal aspects of the business they had?

B and C (E) is correct. Some facts indicate that Barb really anticipated no ownership or managerial responsibility, so both she and Alex may have expected that Barb would be only an employee. 22 They might be surprised, if Barb is held to be a partner, to learn that she both faces liability and has governance rights.

Paul’s claim against Charlie will likely:

Fail because Charlie is not liable for the acts of alex and barb (D) is the correct answer. Based on the facts available, Charlie was obviously not an employee of the ‘zine, so (B) and (C) are wrong. The facts do not suggest that Charlie was a promoter of the business, or that he intended to be a surety for the ‘zine, and there is no mention of any intent to share profits.

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