Answers to Winter 2008
California Bar Exam Questions

Winter 2008 Bar Question 6

Corporations, Professional Responsibility

Albert, an attorney, and Barry, a librarian, decided to incorporate a business to provide legal services for lawyers. Barry planned to perform legal research and draft legal memoranda. Albert intended to utilize Barry’s work after reviewing it to make court appearances and argue motions on behalf of other attorneys. Albert and Barry employed Carla, an attorney, to prepare and file all of the documentation necessary to incorporate the business, Lawco, Inc. (“Lawco”).

Carla properly drafted all required documentation to incorporate Lawco under the state’s general corporation law. The documentation provided that: Lawco shares are divided equally between Albert and Barry; Lawco profits will be distributed equally to Albert and Barry as annual corporate dividends; Barry is president and Albert is secretary.

Carla, however, neglected to file the articles of incorporation until late April. In May, Albert, without consulting anyone, contracted in Lawco’s name to purchase office furniture for Lawco from Furniture Mart. On the same day, also without consulting anyone, Barry contracted in Lawco’s name to purchase telephones for Lawco from Telco.

1. Is Lawco bound by the contracts with:
    a. ComputerWorks? Discuss.
    b. Furniture Mart? Discuss.
    c. Telco? Discuss.

2. Has Albert committed any ethical violation? Discuss.

Answer question number 2 according to California and ABA authorities.

All questions © 2008 California State Bar Exam. All rights reserved

Corporations, Professional Responsibility
Question 6, Winter 2008

1. Lawco, Inc. bound:
a. ComputerWorks.
Defectively formed corporation—De Facto
A corporation is bound by contracts entered in its behalf when the parties reasonably believe the corporation is validly formed and the creditor relies on the validity of the corporate entity. Here, A and B instructed C to incorporate Lawco on or before January, when A and B started doing business. A and B did not know that C neglected to file the articles of incorporation until late April. ComputerWorks relied on A and B’s representations that Lawco was a properly formed corporation when it entered the contract with it. Neither party was aware of the defect.

Lawco will be treated as a de facto corporation, and will be liable for the contract entered with ComputerWorks.

b. A for Furniture Mart.
Bound? A corporation is not bound by a contract unless it approved it by board vote, or ratified the contract after it was entered, or accepted the benefits under it.

Approved? Generally, a corporation is only liable for contracts that are authorized by a board vote. Here, A, Lawco’s secretary, entered into a contract for furniture for Lawco without consulting B and without corporate approval. Therefore, it would not seem that Lawco was liable under the Furniture Mart contract.

Ratified? A corporation’s board can validate a contract after it has been entered by board vote. Here, it does not appear that Lawco  voted to ratify A’s contract. Therefore, Lawco is not bound on this basis, either.

Accepted benefits of contract—Estoppel
As an alternative, when a corporation accepts the benefits of a contract, the corporation is liable under the contract, Here, Lawco used the computers in its business. Therefore, Lawco is liable to ComputerWorks. Since Lawco is liable under the contract, it is bound by the contract.

c. B for Telco.
As above, B acted without board approval, so board authorization and ratification are not ways to bind Lawco.

As above, Lawco probably made use of the telephone equipment, so estoppel would server to bind Lawco.

Actual authority?
The president of a corporation has authority to conduct business for the corporation. This authority can vary from corporation to corporation, but it generally covers making decisions and transacting ordinary business. Only extraordinary expenditures that are not in the ordinary course of business or are for a large dollar amount would require board approval. Here, A is the president of Lawco. From the articles, A and B are the only shareholders. If there are employees, it is likely they are few in number. This means that the telephone equipment for the offices would not be extensive. This would probably be wthin the range of actual authority granted to the president. Therefore, B had actual authority to bind Lawco in the Telco contract.

Apparent authority?
Under partnership principles, a corporation may be bound when the corporate agent had apparent authority to bind the corporation. Here, even if B did not have actual authority to bind Lawco for telephone equipment, it is likely that it would appear to Telco that the president would have such authority. Therefore. Lawco would be found under the Telco contract under the principals of apparent authority.

2. A’s ethical violations
Exclusivity An attorney has a duty to the profession to ensure that practice of law is done only by members of the bar. Here A is permitting B to do legal research and to write legal memoranda which are filed in litigation. Arguably these activities comprise the practice of law. On the other hand, A is reviewing B’s work. If it A is supervising B’s work, such as a lawyer would supervise work of a legal secretary or paralegal, then A is not in violation of the duty of exclusivity. However, several facts make it unlikely A is supervising B’s work. First, A plans on using B’s work in court after reviewing it does not sound as if B is working under A’s direct supervision and direction. “After reviewing it” could means A simply reads over B’s work before arguing from it in court. Second, B and A are effectively partners in Lawco. They are equals with equal votes and sharing equally in the profits This does not put A in a supervisory position over B. Third, B is the president and A is the secretary, so that B actually has a superior position to A. For these reasons, it does not appear that A is supervising B. Therefore A has violated his duty to the profession to ensure that the practice of law is conducted only by members of the profession

Professional law corporation. Under the corporation codes of many states, attorneys must form professional corporations, not general corporations. These laws require that all principals must be attorneys. It is a violation of the corporation code for an attorney to form a professional corporation with a non-attorney.

It is an ethical violation for an attorney to violate the law. If the state where Lawco is incorporated is one where professional corporations are recognized and are limited to attorney members, then A has violated the law in incorporating with B, and is thus also in violation of the code of ethics.

“Lawco, Inc.”— failing to identify attorney by name. An attorney must not practice law under a fictitious business name without also identifying the responsible attorney by name. Here, Lawco is not simply undertaking research and writing on a contract basis for other lawyers; A is actually making appearances in court. A has violated his ethical duty to identify himself as the responsible attorney by use of a fictitious business name, unless he is also identified by name on all pleadings, letter head and advertising.

Answers © 2008 Vivian Dempsey, The Writing Edge™ All rights reserved.

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