Answers to Winter 2017
California Bar Exam Questions

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Winter 2017 Bar Question 4

Corporations

  Question
 

Years ago, Art incorporated Retail, Inc. He paid $100 for its stock and lent it $50,000. He elected himself and two family members to the Board of Directors, which in turn elected him as President and approved a ten-year lease for a store. He managed the store and was paid 10% of Retail’s gross revenues as compensation.

Subsequently, Barbara bought 20% of Retail’s stock from Art.

Retail’s board approved a contract to buy 30% of the inventory of XYZ Co., a company owned by Art.

Subsequently, Art began taking home some of Retail’s inventory without paying for it.

Retail had net profits in some years and net losses in others. It paid dividends in some years, but not in others. In some years, Retail’s board met three times a year; in others, it never met.

Recently, Retail ceased business. Its assets were limited to $5,000 in cash. Among the claims against Retail was one by Supplier, who was owed $10,000 for computer equipment. Another claim was Art’s, for the $50,000 that he had lent and had just become due. Supplier and Barbara, individually, filed lawsuits against Retail and Art.

On what legal theory, if any, can Supplier reasonably seek to recover against Art on its claim against Retail? Discuss.

1. On what legal theory, if any, can Supplier reasonably seek to recover against Art on its claim against Retail? Discuss.

2. Does Barbara have a cause of action against Art, either derivatively or personally? Discuss.

3. If Retail is forced into bankruptcy court, will Art be able to collect from Retail any portion of his $50,000 loan? Discuss.

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Corporations
Question 4, Winter 2017

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