1. ETHICS Lee McNeely told Hardee’s officials that he was interested in purchasing multiple restaurants in Arkansas. A Hardee’s officer assured him that any of the company-owned stores in Arkansas would be available for purchase. However, the company urged him to open a new store in Maumelle and sent him a letter estimating first-year sales at around $800,000. McNeely built the Maumelle restaurant, but gross sales the first year were only $508,000. When McNeely asked to buy an existing restaurant, a Hardee’s officer refused, informing him that Hardee’s rarely sold company-owned restaurants. The franchise offering circular contained no misstatements, but McNeely brought suit alleging fraud in the sale of the Maumelle franchise. Does McNeely have a valid claim against Hardee’s? Apart from the legal issues, did Hardee’s officers behave ethically? Would they want their behavior to be publicized? Would they like to be treated this way themselves? Is all fair in love, war, and franchising?
The court found for Hardee's. Although the court felt that Hardee's personnel were probably irresponsible in providing sales figures for the Maumelle store and overstating the possibility of buying a company owned store, the plaintiff should not have relied on these representations because they were not contained in the offering circular. Hardee's of Maumelle v. Hardee's Food System, 31 F.3d 573 (7th Cir. 1994).
3. Under Delaware law, a corporation cannot appear in court without a lawyer, but a partnership can. Fox Hollow Ventures, Ltd., was a limited liability company. One of its employees, who was not a lawyer, appeared in court to represent the company. Does an LLC more closely resemble a partnership, which may represent itself in court, or a corporation, which requires representation by a lawyer?
Although an LLC is a partnership for federal income tax purposes, it is a separate legal entity (although not a taxable entity). The rights and interests of a member in an LLC are similar to those of shareholders in a corporation. Therefore, Fox Hollow Ventures must be represented by a lawyer in court. Poore v. Fox Hollow Enterprises, 1994 Del. Super. LEXIS 193 (Del. Super. Ct. 1994).
5. Alan Dershowitz, a law professor famous for his wealthy clients (O. J. Simpson, Claus von Bulow, Leona Helmsley), joined with other lawyers to open a kosher delicatessen, Maven’s Court. Dershowitz met with greater success at the bar than in the kitchen—the deli failed after barely a year in business. One supplier sued for overdue bills. What form of organization would have been the best choice for Maven’s Court?
Because there were a number of owners, a sole proprietorship was not appropriate. A general partnership would lead to individual member liability: Since the deli failed, this would have subjected the partners to significant personal liability. A limited liability company, closely held corporation, or S corporation would both protect owners from personal financial liability. As the deli failed, this would be a benefit. An S corp would offer additional tax benefits, such as allowing investors to deduct their losses from the investment.
7. Mrs. Meadows opened a biscuit shop called The Biscuit Bakery. The business was not incorporated. Whenever she ordered supplies, she was careful to sign the contract in the name of the business, not personally: The Biscuit Bakery by Daisy Meadows. Unfortunately, she had no money to pay her flour bill. When the vendor threatened to sue her, Mrs. Meadows told him that he could only sue the business, because all the contracts were in the business’s name. Will Mrs. Meadows lose her dough?
Yes. The Biscuit Bakery was a sole proprietorship. No matter how Mrs. Meadows signed the contracts, she is still personally liable for the debts of the business.
9. A bulldozer burned to ashes in Arkansas. For Lawrence Nolen, the good news was that the bulldozer was insured. The bad news was that Dennis Burnett claimed half the proceeds as Nolen’s partner. Nolen and Burnett had not signed a partnership agreement. This is how Nolen testified at trial:
Burnett talked of buying a dozer. I told him I could borrow the money and set up payments on it. Later I told him if he’d come up with his $5,000 that half the dozer was his. That was the deal. I bought the dozer, borrowed the money from the bank. The note was in my name. I bought the insurance on the dozer. I had a bank account in my name and it was used only for the dozer business. In the meantime I paid him for his time. I may have opened an account at the store for N&B Dozer just to keep my purchases at the store separate from my personal purchases.
Others testified that the parties had agreed they would divide all profits on an equal basis, one-half to each, once the bank loan had been paid in full. Had Nolen and Burnett formed a partnership to own and operate the bulldozer?
The court held that the two men were partners in the dozer business because they were operating as co owners. Nolen v. Burnett, 1992 Ark. App. LEXIS 54 (Ark. Ct. App. 1992).