July 1996 - Vermont Bar Examination Essay Questions - Model Answers

[Model Answer - Question I]
[Model Answer - Question II]
[Model Answer - Question III]
[Model Answer - Question IV]
[Model Answer - Question V]
[Model Answer - Question VI]

Examination Essay Questions - July 1996
MODEL ANSWER - QUESTION I - JULY 1996

     1. Roberta Woodward comes to you for advice. Discuss and analyze the
legality of me actions of me Council and the Authority Board.

     The Health Policy Council and the Health Care Authority are both "public
bodies" as that term is defined in Vermont's Open Meeting Law, 1 V.S.A. §§
310 - 314. This statute requires that all meetings of a public body are open
to the public, except as specifically exempted. § 312(a). The actions of both
the Council and the Authority should be analyzed in light of the Open Meeting
Law's requirements, as follows:

     (a) Quorum issues. The fact pattern states that a quorum of the Health
Policy Council is "a majority" of its 26 members. Because there are 15
members present at the May meeting of the Council, or one more than the 14
necessary to have a quorum, the Council's actions at the beginning of the
meeting are lawful.

     When the Council voted on whether to go into executive session, however,
only 12 members were present at the meeting; the fact pattern states that
three had left the room. Since that number is fewer than the 14 necessary to
have a quorum, the Council's vote to go into executive session was invalid,
since no public body can take formal action except in a public meeting, which
by definition requires a quorum. 1 V. S. A. § 31 2(a)

     (b) Public comments at Council meeting. 1 V. S.A. § 31 2(h) requires
that members of the public be given a "reasonable opportunity" to express
their opinions on matters considered by the public body during the meeting as
long as order is maintained, although the chair of the meeting has the
discretion to impose "reasonable rules" on the public comment time. Here, the
public comment was scheduled before anything actually occurred at the
meeting. By precluding the public from commenting after the substantive
discussion, the chair probably violated the Open Meeting Law. The fact that
members of the public had had previous opportunities to speak out on the
issue at hand probably does not change the analysis, since the Open Meeting
Law requires "reasonable opportunity" for comments at each meeting, not just
on each issue considered by a public body.

     (c) Executive session issues.

     (1) As noted earlier, because the executive session was called on a vote
by less than a quorum of the full Council, the action was invalid under 1
V.S.A. § 312(a)

       (2) Under 1 V.S.A. 313(a), an executive session may be held only after
the affirmative vote of two-thirds of the public body's members present. Even
the lack of a quorum not a problem, this requirement was not met since
only 7 of the 12 "members present" voted in favor of the motion. On these
grounds alone, the executive session was improper.

     (3) An executive session can be called only for one of the seven grounds
listed in 1 V.S.A. § 313(a):

     + Contracts, labor relations agreements with employees, arbitration,
mediation, grievances, civil actions, or prosecutions by the state, where
premature general public knowledge would clearly place the state,
municipality, other public body, or person involved at a substantial
disadvantage.

     + The negotiating or securing of real estate purchase options.

     + The appointment or employment or evaluation of a public officer or
employee. 

     + A disciplinary or dismissal action against a public officer or.

     + A clear and imminent peril to the public safety.

     + Discussion or consideration of records or documents excepted from the
access to public records provisions of 1 V.S.A. § 317(b).

     + The academic records or suspension or discipline of students.

     Because the "political sensitivity" of an issue is not a valid ground
for going into executive session, this portion of the meeting was invalid.

     (4) Even if the executive session had been properly called, the vote
taken during it has no validity, since under 1 V.S.A. § 313(a) no binding
actions may be taken in such a session except one to secure a real estate
contract under (a)(2). However, this is of little importance since the same
vote was taken once the Council reconvened the public portion of its meeting.
The Vermont Supreme Court has recently held that a public body may ratify,
through a later proper vote, an earlier, improperly-taken action. Valley
Realty & Development, Inc. v. Town of Hartford, No. 95-412 (Vt. Aug. 2, 1996),
slip op. at 7.

(d) Appearance of a conflict of interest. According to the fact pattern,
two of the Council members were closely involved with the health care
industry - one was a hospital administrator, and one was on the board of
directors of another hospital. The applicable statutory conflict of interest
provisions, however, do not apply to the Council, which is a purely advisory
body. 3 V.S.A. § 204 applies only to public officials ("a person holding an
office under" the Administrative Departments chapter of Title 3), and 12
V.S.A. § 61(a) applies only to agencies and officials acting in quasijudicial
capacities. In re State Aid Highway No. 1, Peru, Vermont, 133 Vt. 4, 9
(1974). That is not the case here.

(e) The Authority chair's meeting with Dr. Cardinal and members of the
Council. The meeting of the Health Care Authority chair, Dr. Cardinal, and
"several" Council members was not a public meeting, and therefore was not
subject to the Open Meeting Law. A meeting is "public" under 1 V.S.A. §
310(2) only if it is attended by a quorum of the members of a public body for
the purpose of discussing business or taking action. Since only one of the
Authority board's three members was there and only "several" of the Council's
26 members. there was no "Public meeting."

(f) Rulemaking issues. The fact pattern states that the Authority began
the formal rulemaking proceedings as required by the Vermont Administrative
Procedure Act ("APA"), which requires the following:

(1) prefiling the proposed rule, when required;

(2) filing the proposed rule with the Secretary of State;

(3) publication of the proposed rule by the Secretary of State;

(4) holding a public hearing if one is requested by 25 persons, by a
governmental subdivision or agency, or by an association having 25 or more
members, and receiving comments;

(5) filing a final proposal with the Secretary of State and the
Legislative Committee on Administrative Rules;

(6) responding to the Committee's questions or concerns, when required; and

(7) filing the adopted rule with both the Secretary of State and the
Legislative Committee on Administrative Rules.

In the absence of any facts in the question to the contrary, we can
assume that the Authority proceeded with this process.

The Authority's attempt to turn its new policy into an emergency rule,
however, was invalid. Emergency rules are allowed under the APA only in
instances in which the agency believes there exists an"imminent peril to
pubic health, safety or welfare." 3 V.S.A. § 844(a). Even if the rule met
that standard, the emergency rule would be valid for only 120 days. § 844(b).
Thus, the Authority was correct in refusing to assert jurisdiction over the
proposed purchase of a hospital.

(g) Even if the rule were properly adopted, either through the formal
rulemaking process or as an emergency rule, the Authority's attempt to expand
its jurisdiction beyond what is explicitly stated in its enabling statute
would be invalid for at least three reasons. First, under general principles
of administrative and constitutional law, the legislature cannot delegate its
functions to an administrative agency, which is part of the executive branch
of government. Second, administrative agencies have the powers implied by
their enabling statutes that are necessary to do what is required by those
statutes; they have no other implied powers. Trybulskt v. B.F. Hydroelectric
Corp., 112 Vt. 1 (1941). Third, the APA prohibits agencies from using their
rulemaking powers to require permits or licenses not otherwise specifically
authorized by law. 3 V.S.A. § 845(c).

2. Discuss and analyze MCH's appeal and motion to me Supreme Court.

(a) Appeal under FR.C.P. 75. MCH's appeal to the Supreme Court under
Rule 75 would be dismissed, since that rule provides review only to the
Superior Court of actions not appealable as "contested cases" under the APA
if the review is otherwise available by law

(b) Appeal under 3 US.A. .§ 815(a). A person who has exhausted all
administrative remedies available within the agency and who is aggrieved by a
final decision in any "contested case" may file an appeal directly to the
Vermont Supreme Court if not other court is expressly provided by law. It is
unclear from the fact pattern whether MCH has exhausted all administrative
remedies before the Authority. Assuming that it has, however, a proceeding is
a "contested case" only where the agency is required by law or regulation to
hold a hearing. 3 V.S.A. § 801(b)(2). Here, where the Authority refused to
assert jurisdiction over the proposed purchase, there was no CON review and
there could not have been a requirement for a hearing. Therefore, there was
no "contested case" and there is no appeal under § 815(a) to the Supreme
Court. See Widschwenter v. Board of Bar Examiners, 151 Vt. 218, 219 (1989).

(c) Motion for a stay. Even assuming that the Supreme Court was the
proper place in which to take an appeal, the Vermont Rules of Appellate
Procedure state that motions for a stay must be filed first with the
administrative agency acting in a quasijudicial capacity. Only after such a
motion has been denied by the agency may it be filed in the Supreme Court.
V.R.A.P. 8(a).

So what could MCH do? First, section 808 of the APA provides that a
person can ask an administrative agency for a declaratory ruling "as to the
applicability of any statutory provision or of any rule or order of the
agency." A ruling on such a request has "the same status as agency decisions
or orders in contested cases." Id. Had MCH pursued this route, it probably
would have a right to appeal the Authority's final decision not to assert
jurisdiction under the emergency rule to the Supreme Court under § 815(a),
since it would have exhausted all its administrative remedies and be
appealing from a decision equivalent to that in a "contested case."

Alternatively, 3 V.S.A. § 807 allows the filing of a declaratory
judgment action in Washington Superior Court if a rule, or its application,
"interferes with or impairs, or threatens to interfere with or impair, the
legal rights or privileges of the plaintiff." This action is available
whether or not the plaintiff has requested the agency to pass upon the
validity or applicability of the rule in question under § 808.

Had an appeal to the Vermont Supreme Court been proper, that Court would
have reviewed the Authority's decision under a stringent standard of review,
since administrative agencies' actions within their particular areas of
expertise are presumed valid absent compelling indications of error. See
Vermont Development Credit Corp. v. Kitchel, 149 Vt. 421, 427 (1988) and In
re Agency of Administration, 141 Vt. 68, 74 - 75 (1982).

MODEL ANSWER - QUESTION II - JULY 1996 MEMORANDUM TO SENIOR PARTNER August 1, 1996 FROM APPLICANT RE: PLAIN v DEFEN A number of alternative ways to respond to these pleadings exists. I would recommend we begin with a motion to dismiss. The motion should seek to dismiss the action on the grounds of insufficiency of service of process, insufficiency of process and improper venue. The motion would be in the following form: (CAPTION) MOTION TO DISMISS Now comes the defendant, by and through his attorneys, and pursuant to V.R.C.P. 12(b) hereby moves the Court to dismiss the plaintiff's complaints on the grounds of insufficiency of service of process, insufficiency of process and improper venue. Under V.R.C.P. 4, a number of alternatives exist for the service of process. Some of the alternatives are personal service by a person authorized by law or some different person specially appointed for that purpose by a Superior Court Judge. Personal service can be completed upon an individual by delivering a copy of the summons and complaint to the individual personally or by leaving copies of the summons and complaint at the individual's dwelling house or usual place of abode with a person of suitable age and discretion residing therein. Other alternatives to service also exist. One is to serve the summons and complaint by first class mail, together with copies of a notice and acknowledgment. If the acknowledgment is not returned within 20 days after the date of mailing, service may be accomplished by another method prescribed by the rules. Under certain circumstances, service may be made by publication after a showing that personal service cannot with due diligence be made. The Court on motion may order service by leaving a copy of the summons and of the complaint at the defendant's dwelling house or usual place of abode. In the instant case the defendant was served by merely taping the complaint and notice of deposition to his door. There is no indication that this was done on motion and pursuant to a court order; therefore the service is defective and the action should be dismissed. In addition, the plaintiff is required to serve a summons and complaint upon the defendant. In the instant action only a complaint was attempted to be served on the defendant. The instant action is also filed in an improper venue. The case brought hy the plaintiffs against John Defen has no connection to Chittenden County. Both parties reside in Washington County. 12 V.S.A. 402 requires that an action shall be brought in the county in which one of the parties resides if either resides in the state. As both the parties in the instant action reside in the state, the action must be brought in the county in which one of the parties resides. The only proper venue for the case brought by plaintiffs is therefore Washington County. For these reasons defendant would request that the above action be dismissed. ________________________ Attorneys for John Defen In addition to filing a motion to dismiss, the attorneys for John Defen should call the plaintiff's attorneys and seek to postpone or cancel the deposition by agreement. If that fails we should file a motion for a protective order seeking to quash the notice. The motion for protective order would take substantially the following form: (CAPTION) MOTION FOR A PROTECTIVE ORDER Defendant hereby requests that the Court issue a protective order quashing plaintiff's notice of deposition of defendant. V.R.C.P. 30 states that the plaintiff is not entitled to take a deposition prior to the expiration of 30 days after the service of the summons and complaint upon any defendant unless certain conditions are met, none of which are applicable to the present matter. Plaintiff in the instant matter did not
allow 30 days after the service of the complaint prior to the scheduling of
a deposition and did not serve a summons. Defendant would therefore request
that the Court issue a protective order quashing the notice of deposition.

________________________
Attorneys for John Defen

If for some reason we should decide not to raise the venue, process or
sufficiency of process issues or if the action is properly filed and
served, an answer needs to be filed in which Defen will need to admit, deny
or state that he is without knowledge or information sufficient to form a
belief as to the truth of an averment. Assuming that the complaint stays in
its present form, an answer should be filed in substantially the following
format:

(CAPTION)
ANSWER

Now comes the defendant, by and through his attorneys, ... and
responds to the plaintiff's complaint as follows:

1. Admit.

2. It is denied that defendant acted negligently; the balance of
paragraph 2 is admitted.

3. Defendant is without information or knowledge sufficient to form a
belief as to the truth or falsity of the averment and therefore denies the
same.
Count II

4. Defendant is without information or knowledge sufficient to form a
belief as to the truth or falsity of the averment and therefore denies the
same.
Count III


5. Defendant is without information or knowledge sufficient to form a
belief as to the truth or falsity of the averment and therefore denies the
same.
Count IV

6. Defendant admits that David Plain was killed as a result of the
collision.
Count V

7. Defendant is without information or knowledge sufficient to form a
belief as to the truth or falsity of the averment and therefore denies the
same.

AFFIRMATIVE DEFENSES

Defendant asserts the following affirmative defenses:

1. Statute of limitations.

2. Contributory negligence.

________________________
Attorneys for John Defen

Defendant should also consider asserting a counterclaim in the answer.
If defendant desires to assert a counterclaim, it should be asserted in the
answer since, under the facts given, it is a compulsory counterclaim. The
counterclaim could be in the following form:

COUNTERCLAIM

1. Mary Plain negligently operated her vehicle on public highway no. 2
on January 1, 1994.

2. As a result of Mary Plain's negligent operation of her vehicle, she
caused a collision with a vehicle operated by John Defen.

3. As a result of the collision, John Defen incurred medical bills in
the amount of $ _, lost wages in the amount $_, and suffered great pain in
body and mind.

Wherefore, John Defen demands judgment against Mary Plain in an amount
that is determined to be fair, just and equitable by the trier of fact.

________________________
Attorneys for John Defen

The plaintiff did not demand a jury trial. If Defen wants a jury
trial, he should request one not only on the issues raised in plaintiff's
complaint but also on Defen's counterclaim if one is asserted. We should
also request our costs and expenses of the action. We, of course, will need
to sign the answer and counterclaim.

The basis for the affirmative defenses are as follows:

1. Statute of limitations: Under V.R.C.P. 8, the statute of
limitations should be asserted as an affirmative defense. A motion for
summary judgment should be filed with regard to Count IV. The statute of
limitations with regard to a wrongful death action is two years. See 14
V.S.A. Sec. 1492.

2. Contributory Negligence: The negligence of Mary Plain by abruptly
pulling out may reduce or potentially eliminate her claim under Vermont's
comparative negligence statute. See 12 V.S.A. 1036. Her recovery will be
reduced by the percentage of negligence the jury attributes to her. If that
percentage exceeds 50%, she will not recovery anything.

Other issues that need to be raised are:

1. Failure to join a party under Rule 19. The computer was the
property of the corporation which is not a party. Frank is not a proper
party plaintiff as to the computer. This may be raised in the answer, by
motion, or at the trial on the merits.

2. After depositions or other discovery have confirmed the facts
given, defendant should move for summary judgment with regard to the
negligent infliction of emotional distress claim of Frank Plain. He was not
within the "zone of danger" and his claim is therefore fatally deficient.

MODEL ANSWER - QUESTION III - JULY 1996 Bob and Wanda acquired title to both the mobile home and the real estate as tenants in common. Their subsequent marriage did not convert their tenancy in common to a tenancy by the entirety. When they purchased the mobile home it wa personal property, but by its very nature would become real property when it was affixed to some parcel of real estate. If Green Mountain filed the financing statement in the office where a mortgage on the real estate would be filed, then it made a "fixture" filing under 9A V.S.A. Sec. 9-313, and had a perfected security interest in the mobile home even after it became affixed to the land in which Sally had an earlier mortgage interest. The mobile home became a fixture when it was installed on the mortgaged premises. Personal property a fixture, and therefore becomes real property, when there is annexation to the realty, adaptation to the use of the realty, and an intent to make the property a part of the real estate. Sherburne Corn. v. Town of Sherburne, 124 Vt. 481 (1996). Personal property also becomes a fixture if it is so integrated with the real estate that it cannot be removed without causing serious damage to the real estate. The new septic tank and well are clearly fixture and cannot be removed without causing serious damage to the real estate. The mobile home can be separated from the real estate without damaging the real estate, but it too will be treated as a fixture because of the parties' intent. The concrete block foundation, steps, deck and mud room fall in a gray area, but are also treated as fixtures under general principles of property law. Therefore, when Bob and Wanda installed the mobile home on the land, it became subject to Sally's mortgage, but Green Mountain's security interest took priority over Sally's mortgage. Hartford National Bank and Trust Companv v. Godin. Godin and Greenfield Savings Bank, 137 Vt. 39 (1979). Green Mountain failed to file a continuation of its financing statement within five years of the date it acquired a security interest in the mobile home. Therefore, its security interest lapsed and Green Mountain lost its security in the mobile home. 9A V.S.A. Sec. 9-403(2) Fuel dealer's attachment reaches Bob's 1/2 interest in the mobile home and land, but not Wanda's. Therefore, Sally has a first mortgage interest in the mobile home and in the land. Fuel dealer has an attachment of Bob's 1/2 interest in the mobile home and land, subject to Sally's mortgage. Green Mountain's remedy is to bring an action on the debt owed by Bob and Wanda, and to attempt to get a real estate attachment of the mobile home and land. If it gets an attachment, the attachment will be junior in priority to Sally's mortgage, and to fuel dealer's attachment in Bob's undivided 1/2 interest in the property. MODEL ANSWER - QUESTION IV - JULY 1996 I. Question I - Option 1 - Nancy should file a request for an ex parse emergency relief from abuse order, alleging that Joe has physically abused her. She has to establish in her affidavit that he has abused her in the past, and that she is in imminent danger of further abuse. Nancy has enough facts to meet this burden: Joe recently caused her physical injury, he has a history of having abused her before, and the combination of his increased temper and excessive drinking have created a very volatile situation. Her initial emergency order will be good for 10 days. If she wants it to be extended beyond that time, she will need to appear for a further hearing, and Joe will be given an opportunity to contest the order at that hearing. If the Court grants her request for an extension, the final order can last indefinitely . As part of the initial emergency order, Nancy can request that the Court grant her: (a) sole temporary possession of the marital home, (b) sole temporary physical and legal parental rights and responsibilities for the children, and (c) temporary child support from Joe. If she is given sole temporary possession of the home, Joe will be forced to leave the premises and she can stay in the house with the children. This remedy is advantageous for her, since she cannot afford to move out. With respect to the Court's authority to order temporary child support order, the Court can issue such an order for up to 3 months only. If she needs support beyond that time Period she must commence a divorce or separation action . Option 2 - Nancy can, and should, simultaneously file for a divorce or a legal separation, and ask the Court to issue an order for temporary relief. As part of its authority to grant temporary relief, the Court can determine who shall have sole temporary possession of the marital home, and sole temporary physical and legal parental rights and responsibilities for the children. The Court would have to schedule a hearing on this motion; it could not be done on an ex parse basis, as with the emergency relief from abuse order. In determining which party should have sole physical and legal parental rights and responsibilities, the Court would consider a number of factors. These factors would include the relationship of each party with the children, the children's needs, the children's ties to the community, and an analysis of which parent is the primary caretaker of the children. The party who is not awarded sole physical parental rights would be granted parent-child contact. A decision as to which party should be awarded sole temporary possession of the marital home would most likely be dependent upon the parental rights determination. The Family Court would be reluctant to displace the children from their home, and it would grant sole possession of the home to the parent who was given sole physical parental responsibility for the children. Nancy is also entitled to half of the equity value in Joe's business. She contributed her bookkeeping services during the business' infancy years, and the business is considered a marital asset to be shared by both of them. Moreover, her agreement to stay at home with the children after the birth of the second child allowed Joe to spend all of his time developing the business, since he was not the primary caretaker of the children. The business has a net equity value of $25,000.00, because of the liens against it, and Nancy should ask for half of that value. With respect to all of the marital assets, including the real estate and the business, Nancy can also ask the Court to award her more than half of the assets because of Joe's fault in the breakup of the marriage. In this instance, Nancy was abused throughout the marriage by Joe, and it is this abuse that directly led to the dissolution of the marriage. The court may take fault into consideration in any division of property, and Nancy should raise this issue.

The question of whether the $250 per month that Joe has offered is to
be treated as spousal support to Nancy, or as some form of child support,
has tax consequences for her. Spousal support is taxable income to Nancy,
and it is tax deductible for Joe. Child support is neither taxable income,
nor is it deductible. Nancy could try to get Joe to agree that the money be
treated as a maintenance supplement, which is considered an additional
child support amount, and this would not be taxable income to her.

However, Nancy is better off accepting the money as alimony because,
as analyzed above, she is entitled to spousal support. She will not be able
to maintain herself at the marital standard of living with her limited work
experience as a hairdresser, or in bookkeeping. She will need
rehabilitative maintenance for a period of years in order to gain financial
independence for herself and the family. In addition, if she waives her
right to spousal support in the final divorce order, that waiver will be
final and she will not be able to ask the Court to modify this later if her
financial situation worsens after the divorce .

Whether the $250.00 that Joe has offered is an acceptable amount of
spousal support will depend on an analysis of her financial needs and Joe's
future income and personal expenses.

Assuming that Nancy is given sole physical parental rights, then the
Court would also hold a separate child support hearing to determine how
much Joe should pay to her for child support. Unlike the limited relief
from abuse order, the child support would be permanent or until modified by
the Court. Child support is determined based upon the parties' joint gross
incomes, and, at this point, Joe is the only wage earner. If Nancy finds
employment, her wages and childcare expenses would be taken into account,
as well.

As part of the divorce or separation, Nancy could also make a request
that Joe pay her spousal support or maintenance. A spouse is entitled to
maintenance when there has been a long-term marriage, and that spouse
cannot sustain herself in the same standard of living that the parties had
during the marriage. The Court would look at Nancy's financial needs, her
current and potential sources of income, Joe's income and his needs,
Nancy's future employment opportunities, Nancy's need to spend time with
the children, and the standard of living enjoyed during the marriage. Nancy
is a likely candidate for spousal maintenance, given the sacrifices that
she made to stay at home with the children, the fact that she has been out
of the workplace for a number of years, and Joe's actual and potential
income earning capacity.

II. Question II -

Nancy should reject Joe's offer.

In arriving at a division of property, the Court has to consider many
factors, including the length of the marriage, the health and education of
the parties, their current employment and future income earning potential,
each party's contribution to the acquisition and preservation of assets
(including the services of a homemaker), and fault, if any.

With respect to the house and land, Nancy should insist on receiving
at least half of the net equity. There is $80,000.00 of equity in the real
estate, after the mortgage is deducted from the fair market value. Although
the land was given to the parties by Joe's family, it was a gift to both of
them since it occurred after the marriage. The parties have been married 10
years, and they purchased the modular home together; it has been the family
home for them and their children ever since that time. In addition, Nancy
has contributed her services as homemaker, and she has directly helped out
with improvements made to the original structure.

Nancy should not agree to have the house sold within a year. Since she
has sole physical parental rights for the children, the Court will most
likely allow her to stay in the home until the children reach 18 years of
age or finish high school. Nancy can offer to give Joe a promissory note
and mortgage for his 1/2 interest in the equity, payable when the children
reach majority. Joe is not entitled to keep 100% of the value that the
land had at the time he and Nancy received it, since it was a gift to both
parties. All property acquired during the marriage is marital property.

MODEL ANSWER - QUESTION V - JULY 1996 1. The general rule is that all property the testator has an ownership interest in at the time of her death will be included in her estate. This means that the car, house and home furnishings that were Janet's are part of the estate. All of Janet's debt (credit card, car loan, mortgage) is part of the estate as are her mutual funds and the savings account in her own name. The joint bank account is probably not a part of the estate if the entire balance can be withdrawn by either person who is named on the account. Janet's 1/2 interest in the truck is part of the estate, but John's interest is not. None of John's furnishings are part of the estate. Unless an insurance policy is poured into an estate it is not considered part of the probate estate. Thus in this instance the insurance policy is distributed outside of the estate as part of a contract between the insurance company and Janet. Note however, that if Janet retained the right to change the beneficiary, the insurance proceeds would be considered part of the estate for estate tax purposes. Note that John has no legal interest in the house since his name is not on the deed and he was not married to Janet so there is no homestead interest. 2a. In order for a will to be valid in Vermont it must be executed by a testator with proper testamentary capacity. Testamentary capacity includes an ability to understand the natural objects of her bounty, the nature and extent of her property and the significance of her act. The will must be signed in front of three competent witnesses who also witness each other's signatures. A will may be revoked by a subsequent properly executed will stating that all prior wills are revoked, or by marking or destroying the will. The second will is probably valid. Although Vermont does not recognize holographic wills, a will may be handwritten so long as it is properly executed and witnessed by three competent people. In this case the second will was properly executed and expressly revoked the prior will. Note that the second will is valid even though one of the witnesses is named as a beneficiary in the will, and another is a legal heir who is named in the will. Under 14 V.S.A. 10 if a person other than an heir at law witnesses a will in which he or she (or spouse) is a beneficiary, then the bequest or devise is void so far as concerns that individual, or person claiming under that individual. This means that although the second will is valid, the gift to John will lapse and his interest will pass through intestate succession. A gift to Steve would be valid since, as Janet's son, he was an "heir at law". 2b. If the first will is found to be valid the will could be defeated by Katherine, an afterborn child who was not named in the will. She would take in accordance with the laws of intestate succession (one-fourth of the entire estate), 14 V.S.A. 555, paid from the "rest and residue of the estate." 14 V.S.A. 557. The personal property will be divided between Sara and Dave (since it says "share and share alike" which the court interprets as not passing to issue). The $5000 bequest will be given to the charity and what is left of the remainder interest (after Katherine's share) shall be divided equally between Sara, Dave and Sam (Sam will receive, since "per stirpes" means that the gift will pass to issue). Dave and Sam's share will be placed into a trust until they are 21 years old. Before anyone is paid from the estate, all funeral and burial expenses will be paid, then the costs of administration of the estate and all outstanding debts will be taken care of. John will not receive anything under this will, and cannot defeat the will, because he was not married to Janet. (No common law marriage in Vermont.) 2c. If the second will is found to be valid, the house and its furnishing will be divided between Sara, Dave and Katherine. Note that Sam is not entitled to a share since the will provides this distribution to "my children, now living," and the language of a will "speaks" at the time of death. Thus, while Steve was alive at the time the will was signed, he predeceased Janet, so the gift to him lapses under this provision. Note that Katherine's entitlement to inherit is not effected by the fact that she was born out of wedlock. 14 V.S.A. 553 . With the exception of $2000 to be given to charity, the remainder of the estate will be distributed Outside of the will since John cannot take from a will that he has witnessed. This means that Sara, Dave, Katherine and Steve's legal representative (and ultimately Sam) would each take an equal share of the remainder interest. As discussed above, the estate would first pay all of the all funeral and burial expenses, then the costs of administration of the estate and all outstanding debts will be taken care of. Then the specific bequest to the charity will be paid. 2d. The doctrine of Cy Pres provides that when a charity is no longer in existence at the time a will is probated, if the will indicates a general charitable intent, then a similar organization can be granted the bequest. 14 V.S.A. 2328. Otherwise, the gift would lapse and would pass through intestate succession. In this case, the first will indicates no generalized charitable intent since it simply names the specific charity. The second will indicates a general charitable intent "to protect children from abuse in our society." Accordingly, under the second will, an alternate charity can be designated to receive the bequest. 3a. An executor should be appointed (Sara, under the second will) who can manage the estate and pay the bills as they become due. The executor can petition the probate court for permission to sell mutual funds or the car in order to pay the current expenses of the estate. In addition, she is able to use the savings account to pay these expenses. The executor must protect the assets during the probate period. 3b. The probate court could be petitioned to allow money to be released to pay for Dave's College tuition, room and board. Any amounts distributed to him will reduce his share of the distribution. 14 V.S.A. 2322. Note that provisions for the care of minor children can be made while the estate is being probated, however, since Dave is over 18 this will not apply to him. 3c. The executor has an obligation to preserve the assets of the estate. This may mean preventing John from continuing in his renovations if they will diminish the value of the house. In addition, the executor might require John to pay a reasonable rent for the house while the estate is pending. The executor might also try to prevent John from using the car, and requiring the truck to be repaired. As a practical matter, the beneficiaries might be inclined to allow John to remain in the home (since it is Katherine's home) but might request that he refrain from making major changes to the home until they could all decide what was going to happen with it. (Perhaps John will buy out their interest in the house with the insurance proceeds). MODEL ANSWER - QUESTION VI - JULY 1996 1. I would recommend a limited liability company, under Vermont's new statutes. 2. a) There are no limits on the number or kind of "persons" who may be owners of a limited liability company (LLC). There are also no limits on the number or kind of persons who may be owners of more traditional business forms, such as partnerships, limited partnerships, and corporations. However, in order for a corporation to receive favorable pass-through income tax treatment under Subchapter S of the Internal Revenue Code, that corporation may not have more than 35 shareholders, and none of them may be corporations, or non-residents of the United States. A Subchapter S Corporation is thus not a good option here. b) Only an LLC would give this group the kind of flexibility they seek regarding business involvement. In a corporation, the shareholders have limited involvement in the day-to-day operation of the business, unless they become officers or directors. In a partnership, all of the partners, in theory, share decision making authority and responsibility for the day to day functioning of the business, but they also share liability for its debts. In a limited partnership, only the general partner or partners control the business. A limited partner who becomes actively involved in the operation of the business will lose his or her limited liability. In an LLC, there are two management style choices. The business may be member managed, approximating a partnership (but without partnership liability), or manager-managed, having a centralized management, and approximating a corporate style. The decision whether to have centralized (manager-managed) management must be made when the LLC is established, and incorporated into the LLC articles. In this case, as I will discuss below, because of the members' desire to be able to avoid the duty of loyalty to the company, they should choose to be manager-managed. Members will still be able to take active part in the running of the business. Unlike in a limited partnership, members of an LLC do not lose their limited liability if they become involved in the operation of the business. c) They are right to be concerned about liability protection in light of the particular business they have chosen. An LLC gives all members protection from liability for the obligations of the business. Members risk only the investment they have made in the corporation. A limited partnership would give them the same advantage, but they could have no involvement in the active running of the business. A corporation would also offer limited liability to shareholders. However, in a traditional partnership all of the partners are liable for partnership obligations, and may be sued individually by creditors of the partnership. d) If the LLC is established correctly, it will fit within the IRS safe harbor rules allowing such organizations to pass through profits to the members, so there will be tax consequences at only one level (to the members). In order to obtain this favorable tax treatment the investors need to make it clear in the articles of organization of the company that the LLC has no more than two of the traditional corporate characteristics: 1. continuity of life, 2. free transferability of interests, 3. limited liability, and 4. centralized management. In this case, the investors require limited liability and centralized management (to retain the right to avoid the duty of loyalty), so they must not have continuity of life or free transferability of interests. An LLC under Vermont law lacks continuity of life by definition, because on the death, retirement, or resignation of a member, it requires a majority vote of the remaining members to continue the business. This is sufficient to meet IRS requirements. These investors will be able to avoid being labeled as having free transferability of interests as long as the members cannot sell or transfer their interests without the consent of the other members. The disadvantage of the LLC's tax treatment by the IRS, is that it is necessary to obtain private letter rulings in advance to be sure that the particular LLC will meet the IRS guidelines. An S corporation is automatically entitled to pass through partnership-type taxation, as long as it meets the IRS's requirements regarding number and type of shareholders, and class of stock (only one is allowed). A partnership or limited partnership is also automatically entitled to pass through taxation, of course. (A corporation which does not meet Subchapter S requirements is taxed at the corporate level, and then any profits it distributes to shareholders are taxed again to the shareholders.) 3. Again, the LLC is clearly the form which best meets these investors' unique requirements. In an LLC, the owners may be involved in some of the business decisions, and avoid a duty of loyalty as well (as long as the LLCis manager-managed). In addition, the LLC agreement may specify particular kinds of activities in which members may engage which will not be treated as a breach of the duty of loyalty to the business, even if it is member managed. These exemptions could not extend as far as Philips has suggested, however. Direct competition in a similar business would be a breach of loyalty by a member-manager even in an LLC. Therefore, manager-management seems to be the best choice for this particular LLC. 4. In a manager-managed LLC, the death of one of the members has no effect upon the continuation of the business, unless that member is also a manager, in which case the business may continue if a majority of the members vote to do so. Upon the death of a member, the decedent's successor in interest may enforce that member's purchase right (right to obtain fair value and terms of purchase of that member's distributional interest), but the successor in interest does not automatically become a member of the T.T. 5. I have been contacted by Reynolds and Philips only. I can continue to represent and advise them of the best means to meet their goals, even if the other members of their potential investment group do not share all of those goals. I would urge any of the potential investors who have different goals to obtain their own attorneys, so that we can all work together to find a business plan that will best meet the goals of all the potential investors, after negotiating and exchanging proposals. Clearly, I cannot represent investors with divergent interests; that would be a conflict of interest.
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