Ch. 10: Contracts 10/28/15 7:31 PMContract Law

Provides a mechanism to deal with others Law of contracts has evolved in commerce over the centuries Freedom of contract

o People who create legally binding relationships have responsibilities

Common Lawo Judge-madeo Differs by stateo There is uniformity to general contact principles that run

throughout most states’ lawso Lex mercatoria- the law merchanto Roman law of Contracts was sophisticated

It covered the Roman Empire Uniform Commercial Code (UCC)

o All states have entirely adopted it, except for Louisianao Covers contracts regarding the sale of goodso Many countries rely on Code Law for their basic legal

frameworkDefinition of a Contract

Contract: o “an agreement upon sufficient consideration, to do or not to

do a particular thing” –William Blackstoneo “a promise or set of promises for the breach of which the law

gives some remedy or the performance of which the law in some way recognizes a duty” MODERN DEFINITION

centers on promise the promise itself creates a manifest of intent (meeting

of the minds) Contracts form legal relationships and duties between parties

Not all promises are enforceable contractso The promise must meet the requirements of a contract to

create an enforceable promise Express Contract: Direct statement made by the parties regarding

the promises madeo Oral or writteno All terms are expressly stated between the parties

Implied Contract: Actions and circumstances infer and define the terms of the contract

o Words, conduct, or gestureso Contracts are implied at law

Elements of a contract Offer and acceptance

The Offero Offer: Promise to do or refrain from doing something specifico Offeror: party making the offero Offeree: the party that the offer is being made too Manifest of intent (meeting of the minds)

Preliminary negotiations Invitations to negotiate or make an offer

Ex) talking about price of a car with a sales person

Intent to offer Whether what the person said is actually

considered an offer Ex) “I want to sell my car for $5,000

o Definite terms and conditions Not every detail needs to be present for an offer to still

be valido Communication

The Offeror:

Communication Time Effective Legal EffectMakes an offer When the

offeree receives it

When the offeree accepts it

Revokes an offer When the offeree receives it

The offeree no longer has the power to accept

The offeree:Communication Time Effective Legal EffectRejects to offer When the

offeror receives it

When they terminate the offer

Makes a counteroffer

When the offeror receives it

When they terminate the offer

Accepts an offer When it is sent by the offeree

When a contract is formed

Terminating an offero Termination: either the offeror withdraws the offer of the

oferree rejects it Can occur from the parties actions or the law or through

lapse of timeo Option contract: a binding promise to keep an offer open for

a specified period of time Must have been formed though an offer and acceptance The offer may not be withdrawn during the specified

timeo Revocation: withdrawing the offer by the offeror

Must be done before the offeree has accepted ito Rejection: withdrawing the offer by the offeree

Counteroffer: a proposal by the offeree to change the original offer

Keeps the negotiation but has new conditions A contract may terminate over a lapse of time

If there isn’t a specific time for acceptance, after a reasonable amount of time since the offer has been made passes, the offer will be terminated

What is reasonable depends on the circumstances

o Operation of the law When an offer is terminated due to a conflicting law

Ex) making a bet on the internet over college football teams. The bet is terminated because it is illegal to gamble online

When the subject matter is destroyed Ex) you offer to sell me your old car, I accept, and

then you total it. The offer is terminated If you had told me you would sell me a

specific type and brand of car the offer would still stand though because you can get another one of that car made

If the offeror or offerree dies or has a mental/physical incapacity

The Acceptanceo Acceptance: an offeree’s expression of assent or agreement

to the terms of an offero To be effective an offer must be:

Unconditional The acceptance must be the mirror image of the

offer Key parts of the offer must be in the

acceptance If conditions are added, it is considered to be a

counter offer By changing these terms there is no longer

an unconditional acceptance Unequivocal

“I accept” or any other clear acceptance of an offer

silence is not an acceptance unless past business dealings allow silence by the offeree to be an acceptance

Properly (legally) communicated Factors that are important in whether or not the

acceptance was properly communicated: Method of acceptance Timeliness of acceptance Performance of an acceptance

Courts created a general rule that if the method of acceptance is reasonable under the circumstances, the acceptance is effective when it is sent.

o Bilateral contracts: an exchange of promiseso Unilateral contracts: when an offer is accepted by

performance Ex) you say I’ll pay you to mow my lawn, I don’t say

anything but you mow my lawn anyways The offer has been considered accepted and the

contract is valid

o CASE- Certified fire protection v. Precision construction Precision construction is a general contractor that bid on

the job They got bids from subcontractors for the design and

installation of a sprinkler system for fire prevention Certified fire protection submitted a bid for

$480,000 and won Precision began construction

Dec 5- Precision sent CFP a copy of the contract along with construction plans and sprinkler requirements

CFP had to have preliminary design draws within 2 weeks and prove an insurance certificate

Jan 19- No signed contract or insurance certificate CFP billed Precision for $33,575, although the

plans were not ready Jan 26- Precision told CFP that they were holding up the

project so Precision was going to move ahead without CFP

Feb 1- CFP submitted drawings but objected to the terms in the contract

Making this a counter offer!! Feb 8- Precision was informed of mistakes in the

sprinkler system drawings Feb 16- Precision told CFP that they were ending their

relationship The contract wasn’t signed There was no insurance certificate The drawings were incorrect

CFP sued for breach of contract They said they should be given payment for the

sprinkler system drawings Trial court- HELD for Precision

Said no contract ever existed CFP appealed

A contract requires an offer and an acceptance

Meeting of the minds: when parties have agreed upon contract’s essential terms

Essential depends on the agreement and its context

CFP said the progress bill they sent precision established the price term and that Precision urging certified to get started on designs established the scope of work for an express contract

Design drawings are tailored for the company so they are not useful for another installer

The price and the scope of work terms was missing The parties never agreed to performance time CFP said this was an implied contract

Must be manifested by conduct Show intent

o This was not true in this case HELD: no contract was ever made

Precision never agreed to a contract for only design related work

They wanted a design and install contact for a sprinkler system

There was no agreed upon price Disputes included time of performance

The designs are installer-specificConsideration: something of value or something bargained for in exchange for a promise

Distinguished a contract from a gift If consideration is absent, neither party can enforce the promise or

agreement The traditional rule is that an exchange is a consideration if either of

the following is created:o Legal detriment: an act, promise to act, or promise to

refrain from acting to the promiseeo Legal benefit: promisor acquires some legal right through

the promisee’s act, promise to act, or promise to refrain from doing an act

o ^^ usually both of these things occur at once Adequacy of consideration

o Courts don’t look much into the adequacy of considerationo If a party bargains poorly, creating an unequal exchange, the

courts usually wont interfereo Those who choose to bargain take on the risk of their own

errors Exceptions:

Fraud, duress, etc.o The courts main concern is that there was an exchange of

mutual promises and obligations by the partieso CASE- Caley v. Gulfstream Aerospace Corp.

Gulfstream adopted a dispute resolution policy as a procedure to resolve disputes between Gulfstream and the employees

They mailed the policy to the employees The policy said that the policy would begin in 2

weeks It would be “a condition of continued

employment” If the employee continued work, they

accepted the policy A group of employees sued saying there was no

contract and the policy could not be enforced District court HELD for Gulfstream Employees appealed HELD: AFFIRMED

The policy is an offer and states it’s a contract The terms of acceptance are continued

employment by employees Acceptance can be through a promise or an

acto In this case, the action of continuing

employment means that the employee is accepting the offer and contract

Employees could either: Continue working and accept the policy Terminate their employment

There is bargained for consideration by mutual promises and obligations

Enforceable promises without considerationo Promissory Estoppel (Detrimental Reliance): avoids

injustice due to the promisee’s reasonable reliance on the promisor’s promise

The promisor is prevented from denying a promise This is not enforced lightly by the courts

o Ex) if a museum is relying on $50 million worth of donations to do a construction project, they get the money promised to them by donators, so they start the construction, and then a big donator backs out, the court may rule promissory estoppel and force the donor to make the gift because the building contract was entered with the reliance of the donation being made

o CASE- Hinson v. N&W Construction Company, Inc N&W Construction Company, Inc prepared a bid to

submit to MJCC to build a kitchen. They received oral bids from plumbing subcontractors Hinson quoted $92,000

N&W used this bid in preparing their bid to MJCC N&W got the contract from MJCC N&W contacted Hinson to get the work to begin

Hinson didn’t sign and returned the plumbing subcontract

Hinson refused to do the job N&W hired the next lowest bidder at $139,000 (had to

pay an additional $47,000) N&W sued Hinson based on promissory estoppel Trial court: HELD for N&W

Awarded them $47,000 Hinson appealed Court of Appeals: HELD

Hinson provided a verbal quote and was satisfied with it

Hinson refused to do the job because he “had a lot of other jobs going on”

N&W was relying on Hinson’s proposalCapacity to contract

Contractual capacity: legal ability to create a contract Some have limited capacity to contract:

o Minorso Intoxicated personso Insane persons

If someone has NO CAPACITY the contract is VOID If someone has PARTICAL CAPACITY the contract is VOIDABLE

o The person with partial capacity had the right to disaffirm it Until the mid 19th century, married women didn’t have capacity to

make contract independent of their husbands Void & Voidable contracts

o Void contracts: contract does not exist at law, so it cannot be enforced

Examples: Illegal subject matter Legally insane person

o Voidable contracts: one party to the contract has the right to avoid legal obligation

The contract is valid, but it is capable of being voided by a circumstance

Examples: Minors One party was under the influence of drugs

or alcohol Fraud

Minorso Person under the legal age of majority

Traditionally this was 21 Now it is 18

o Minors have partial capability

Contract is voidableo Legally- to protect the young from the “results of their own

folly”o General rules:

Minors may disaffirm contract at their option If a minor disaffirms a contract after receiving

benefits, restitution must be paid for the benefit Some contracts may not be disaffirmed:

o Enlistment into the armyo Marriageo Educational loanso Insurance loanso Medical care

o After reaching majority, the minor may ratify the contractLegality

If a contract is lacking legality, the courts will not enforce it Subject matter must be lawful

o Examples of unlawful subject matter that lack legality therefor the court will not enforce it:

Criminal activities Sale of prohibited drugs Gambling activities in some states

Usury: when interest rates are above the maximum that is allowedo The court can strike an entire bargain as unenforceable or

only the part that concerns an illegal subject matter Unenforceable contracts: the contract was legal and enforceable

when it was made, but a change in the law no longer makes it legal therefor it is no longer enforceable

o Ex) Company ships wheat to Iran, but once its at sea, the US government declares no US firm can trade with Iran. The contract is no longer enforceable under US law even if it is still enforceable under Iranian law

o Contracts contrary to public policy Exculpatory agreement: releases one party from the

consequences brought about by wrongful acts or negligence

ex) an employment contract says an employee wont hold the employer liable for any harm caused while on the job, including intentional torts

this violates public policy so it is not enforceable

Unconscionable contracts: when one party takes advantage of another party and makes the contract unfair to the innocent party

Ex) a furniture store sold a lot of items to a low-income man. In the contract they said none of the goods were paid for until every item had been paid for. When the man didn’t pay for the last item, the store tried to reclaim all of their furniture.

This was considered unconscionable Contracts in restraint of trade

Contracts that either restrain trade or unreasonably restrict competition

Covenant not to compete: an agreement not to compete in a given market, employment law

Limited by time, territory, and ancillary to the contract

Different states vary on this matter Often used in the sale of business or

employment contracts Ex) I buy your restaurant, in the contract I

state that you will not open up a new restaurant within 5 miles of the one I just bought

Case- Arthur J Gallagher & Co v. Babcock Arthur J Gallagher & Co. buys a Louisiana

broker, Babcocko Part of the deal was that Babcock and

several employees would work for them

Added a restrictive covenant:

o If any of the employees left they would not compete with him in Louisiana for 2 years

A few years later Babcock and others quit to work for a competitor

o This drew 13 clients to their new employer

Gallagher sued Babcock for violating an agreement that had a non-solicitation agreement and a non-competition agreement

o Said Babcock and other employees solicited his clients in competition with their former employer

Trial court limited the geographic region to 9 parishes where Babcock couldn’t compete with Gallagher

Jury awarded Gallagher $1.2 million in damages and attorney fees

Babcock and other employees appealedo Said non-competition provisions

weren’t valid because: Their language Their geographic scope

Agreement prohibited defendants from competing against Gallagher or soliciting its clients for 2 years after employment was terminated

Provisions in the agreement were less restrictive than what is allowed under state law

Gallagher allowed his former employees to work in similar business, just not on accounts they worked on with Gallagher

Court relied on contractual severability clause to excise the geographic areas where an employer could not conduct such business

District court agreed and eliminated 55 parishes where Gallagher did not provide insurance service HELD: District court decision was AFFIRMED

Reality and Genuineness of Consent The right in individuals to freely enter bargains of their choice Reality of consent (genuine consent): if misrepresentation or

fraud was present when the contract was made, there is no contract If reality is missing, there is no meeting of the minds (manifest of

intent)o Unilateral mistake: when one party to a contract enters

with false information or accidentally makes an error in a significant matter

If this happens the contract can be avoided Ex) typing $20,000 instead of $200,000

Without this element the contract is void of voidable Examples:

o Fraud: one party tries to get another party to enter a contract based on false information

o Misrepresentation: intentional, based on negligence, or innocently made in innocence

o Duress: when someone is forced to sign a contract because of a threat that is made with no sensible way out

o Undue influence: a person enters a contract because they have so much trust in the person that is persuading them

Ex) elderly and their caretakers Statutory exceptions: pressure by sales people

o ex) federal trade commission’s cooling off rule door to door sales contracts can be cancelled if they’re

more than $25 within 2 business daysContracts in writing and the statute of frauds

Contracts do not always have to be in writing to be enforceable

o Better because they are difficult to deny and good evidence of the agreement

Statute of Frauds: prevents parties from claiming a contract existed when it did not forcing some contracts to be in writing for them to be enforced in court:

o Sale of lando Contracts that cannot be performed within 1 yearo Promises to pay someone else’s debt, including debt of an

estateo Promises made in the consideration of marriage

Sufficiency of the writingo For the writing to be sufficient under the statute of frauds, it

must set out the material terms of the contract Names of the parties Consideration offered Subjects matter of the contract Etc

o Invoices, emails, sales orders, checks, confirmations all may satisfy this requirement

The parole evidence rule: restricts the use of oral evidence when that evidence is contrary to the terms of a written contract

o Evidence cannot contradict, change, or add terms to written contracts

o If a written contract is incomplete, ambiguous, proves fraud, mistake, or misrepresentation, then oral evidence may explain the problems

o Case- Deschamps v. Treasure State Trailer Court 2003- Rasmussen agreed to sell Deschamps a mobile

home trailer park with 96 spaces for $1,445,000 contract explained how Rasmussen would be paid over

time after the sale was complete, Rasmussen died

his estate inherited the asset Deschamps found problems with the water system

which required $400,000 in repairs 2006- Deschamps stopped making payments

said the cost of water system repairs made it impossible

Rasmussens estate sued Deschamps counter sued for contract breach/fraud Deschamps contended Rasmussen said that the water system was in good

condition and that the occupancy rate was higher than in fact it was

The trial court held for estate Said Deschamps claims were precluded by the

parol evidence rule HELD: AFFIRMED

When the language of a contract is clear and unambiguous you have to look at the substance of the contract itself

Contract said deschamps didn’t rely on any oral assurances of presentations by Rasmussen

Deschamps can now not claim otherwise Deschamps signed a contract prepared by his real

estate agent saying that he had not relied upon assurances by Rasmussen

BOTTOM LINE: GET EVERYTHING IN WRITING

Performance, Discharge, and Breach of ContractPerformance

Most contracts come to an end by performance Substantial performance: the contract has basically been fulfilled

and payments have been madeo Parties are expected to act in good faitho Usual remedy is contract price minus damages that have

resulted from a lack of a complete performance Material breach: performance is substantially less than what was

requiredo Damages are now due to a non-breaching party

Executed contract

o Fully completed contract, nothing was left undoneo If you have fully performed, damages for the price of

performance may be sought as a remedy Executory Contract

o Not fully performedo If a partial delivery of the products occurred, buyers don’t

need to pay the total contact priceAssignment and delegation

Assignment: transferring contract rights to another persono Ex) a dentist asking to put your new crowns on someone

else’s teeth Delegation: transferring duties to someone

o Ex) Kobe Bryant asking someone else to play for him Many contracts can be assigned or delegated, but there can be

exception in contracts for services Third party beneficiary: a party who is not part of the original

contract who acquires rights under the contracto Usually occurs in credit contracts

Breach Breach of contract: when a party to a contract doesn’t perform as

requiredo The party injured may be entitled to a remedy.

To determine the remedy, the court looks at the extent of the breach

Material breach: performance is significantly less than the contract provides

Anticipatory breach (repudiation): a party shows a lack of desire or an inability to perform

Discharge by agreements of the parties Rescission: when both parties agree to terminate the contract

without performance Novation: all parties agree to discharge one party from the

contract and create a new contract with another party.o The new party becomes responsible for the discharged parties

performance Accord & Satisfactions

o Accord: an agreement by the parties to offer and accept performance that differs from the original agreement

o Satisfaction: the actual performance of the new obligationDischarge by impossibility

Impossibility of performance: used to end the obligations to a contract when an event occurs that makes performance impossible

o The impossibility doctrine has been extended to commercial impracticability or frustration

RemediesDamages

Monetary Damages:o Compensatory damageso Actual damageso Expectancy damageso Liquidated damages: an amount specified in the contract to

be paid in a breech Penalty: if the liquidated damages are too excessive

o Nominal damages: plaintiff suffers a breach of contract but not a measurable economic loss

o Punitive damages: when the wrong doers conduct has been willful or malicious and fraud was involved

If there’s a tort related to contracto Special damages

Equitable damages:o Specific performance: requires the party who did the wrong

to do the obligations that were promised in the contracto Injunction: requires a party to refrain from performing

certain actso Restitution: if one party has received a benefit but hasn’t

paid for it, the court can order payment to be made or for the goods to be returned

Mitigation of damageso Mitigate: to lessen the losses that may have been incurredo The injured party is required to make an effort to mitigate or

lessen the losses

Economic Loss Rule: in a breach of contract case, if there is no tort involved, damages are only those related to the economic losses suffered by the breach

o This is applied based on 3 policies:1. Maintain fundamental distinction between tort law and

contract law2. Protect commercial parties’ freedom to allocate risks by

contract3. Encourage the party best situated to asses the risk of

economic losso Damages are only related to the lost profits and costs due to

the breach Accounting evidence and specific calculations are

necessary evidence that needs to be provided (no punitive damages or mental distress awards)

parties will try to assert a tort along with a breach of contract to get these damages

Case- DeRosier v. Utility Systems of America, Inco DeRosier owned land on a hillside

Before he could build a house on it, a lot of it needed to be filled with dirt

o USoA was doing nearby construction and it would dump excel dirt on his lot

It saved them money than to haul the dirt awayo DeRosier got a permit from the city for 1,500 cubic yds of fill

to be dumped on his property Gave permit to USoA

o UsoA dumped 6,500 cubic yds and 5,000 cubic yds had to be removed bc the permit was violated

USoA denied responsibility and offered to remove the excess for $9,500

o DeRosier suedo Trial court granted DeRosier $22,829 damages for the other

company he had to pay to remove the dirt and awarded him $8,000 for delay of time in constructing a new home

o UsoA appealed

DeRosier failed to mitigate damages by having USoA remove the dirt for $9,500 rather than $22,829 that he paid to another company

o Consequential damages has to do with the damages that can be distinguished from general damages. They are not recoverable unless they are reasonably foreseeable by the parties at the time of breach

o District court: HELD $8,000 in consequential damages HELD: calculating and granting $22,829 in general

damages HELD: DeRosier could decline the offer from UsoA to

remove dirt for $9,500 Did not unreasonable reject the offer or fail to

mitigate his general damageso Reversed in part affirmed in part?

Quasi Contracts: gives relief to innocent parties even though no contract exists

Quasi = almost Quantum meruit recovery

o Legal concept that is used by the courts to prevent injustice Courts apply this in equity to give relief to innocent parties

o Ex) people come and pave your driveway in good faith, do you pay them when the bill is sent?

Under quasi contract, yes Case- Scheerer v. Fisher

o Scheerer is a real estate agento Seller &Fisher greed to pay sheerer 2% commission

The deal fell aparto Fisher formed a new company

He had a 3rd party- Antonio- buy the property and then sell it to fishers new company

o Sheerer learned of the deal and hadn’t made any commission from it

o Sheerer sued for breach of contract on quantum meruit compensation

o Trial court said he had no contract or basis of paymento Sheerer appealedo REVERSED

Defendants took action to deny sheerer compensation for services rendered

Although the original contract failed, the law implies a promise to pay some reasonable compensation for services rendered

The allegations made for a valid quantum meruit claim

Ch. 11: Domestic and International Sales 10/28/15 7:31 PM

Introduction to the UCCHistory of Commercial law

English courts began to use lex mercatoria (“law merchant”)o Rules developed by merchants in medieval Europe governing

trade issues Sales Payments Insurance Shipping

o Traditionally merchants who disregarded the rulings under the law would be shunned by other merchants

The Roman law of contracts was surprisingly sophisticated covering countries that were governed by the Roman Empire

In the early 20th century, each state had a different set of commercial laws that made it difficult to expand business into states with different laws

All states have accepted the Uniform Commercial Codeo COVERS CONTRACTS FOR THE SALE OF GOODS

Most countries rely on code law for their basic legal frameworkApplication of the Uniform Commercial Code

Applies instead of the common law of contracts when: o It governs contracts for the sale of movable items that aren’t

money or an investment security No services, real estate, or professional services

If a contract is a mix of goods AND services:o Court determines whether the common law or the UCC should

govern Usually this depends on whether the contract primarily

involves goods or primarily involves serviceso Parties can agree that the UCC will apply in court

Primarily up to the state, not the federal government Each state has adopted some version of the UCC statue

The purpose of the UCC is to “simplify, clarify, and modernize the law governing commercial contracts”

CASE- Paramount Contracting v. DPS Industrieso Paramount needed dirt for a construction projecto DPS offered to sell dirt and bring it to the construction site

DPS says Paramount accepted their offer Paramount denied that they accepted the offer

They hired another company to bring them the dirt

o WAS THIS CASE GOVERNED BY ARTICLE 2 OF THE UCC OR BY THE COMMON LAW?

When a transaction involves both goods and services, article 2 applies depending on the “predominant purpose” of the transaction

o DPS said the contract was for the sale and delivery of dirt, so article 2 would apply

o Paramount said DPS was to perform services by placing and compacting the dirt at the site, so the common law would apply

o DPS sued for breach of contracto The jury found for DPS

Awarded DPS damages for sale of goods under the UCCo Paramount appealed

Said no contract had ever been made This was a service contract

o Paramount said they had a contract for construction at the Atlanta airport

They used a quote that was given to them by DPS in their bid

This led DPS to believe that there was an agreement to sell and deliver dirt

o DPS sent Paramount a letter: “holding the dirt ready to be hauled. Once they receive the 10 day notice”

Paramount did not respond in writing They later decided to buy dirt elsewhere

o HELD: Evidence shows that the predominant purpose of the transaction was the sale of dirt

The UCC applied The trial decision was affirmed

Goods, Merchants, Sales, and Titles under the UCC Goods: something that is movable and tangible

o Something in a sales contract is not considered a good under article 2 unless it can be carried from one location to another and has a physical existence (can be seen and touched)

Good faith: honesty that a transaction occurredo All parties are bound to this in an UCC article 2 sales contract

Sale: the passing of a title from the seller to the buyer for a price Title: represents the legal rights of ownership

o A party may hold this if:1. The good exists2. The good has been identified to the contract

The seller has specified which goods are being sold to the buyer

o The UCC allows the title to pass when any of the following occur:

Goods arrive for shipment at a port Goods arrive at the buyer’s warehouse Goods leave the sellers warehouse Goods are halfway between the seller’s factory and the

buyer’s warehouseo If its not specified when the title passes, article 2 says the title

passes when the seller completes all obligations regarding delivery of goods

If the goods didn’t need to be moved, then it passes when the seller delivers title documents

o If the seller sells stolen property, the title doesn’t pass to the buyer

Forming a Sales Contract Common law usually governs contracts unless the UCC changes, or

modifies, the rule,

If parties don’t specify which law governs a contract, the courts look to see whether its under common law or the UCC

The UCC tends to reduce the formality of contract lawOffer and acceptance

Under common law:o Offer:

Terms and conditions need to be detailedo Acceptance:

Needs to be unconditional, definite, and legally communicated

Under the UCC:o Offer:

If the party intends to enter a binding agreement, a contract exists

Even if some of the offer’s terms are left open or omitted

o Acceptance: The accepting party can add or change terms Can be communicated in any reasonable way

Must intend to create a binding agreementIntent to Contract

Under the UCC a sales contract can be made in any way that is sufficient enough to show agreement

o It doesn’t matter if the moment of contract is uncertain Indefinite offer

o It’s ok if some major terms (price, delivery, or payment terms) are left out

o Usually need quantity unless it’s a(n): Output contract Requirement contract

Courts require good faith dealingo They don’t allow for one party to profit from bad fortune of

the other party due to unexpected large changes in circumstances

Merchants firm offerso A merchant needs to sign in writing how long the offer will

remain open for This is a firm offer an it is irrevocable

o If this is not stated in the offer, the offer stays open for a “reasonable time”

CASE- Crest Ridge Construction v. Newcourt, Inco John & Joe set up their own construction company- Crest

Ridge They are awarded a subcontract to provide wall panels

o They want to use panels made by Newcourt Price was $760,000 subject to credit approval

This was because crest ridge was a new company, there wasn’t much credit info

o Over the next 6 months, detailed discussions about the panels and shipments were set

o Right before delivery Newcourt demanded money in full The industry practice is 45 days after shipment

This is so the subcontractor has time to give the goods to the general contractor, who will pay the bill

o Crest ridge could not make an advance payment They had to find another supplier at a higher price

o Crest ridge sued Newcourto The jury awarded Crest Ridge $70,214 in damageso Newcourt appealedo AFFIRMED: Breach of contract by Newcourt

“subject to credit approval” didn’t say that there was not a contract

UCC looks to see if there was any manner that showed agreement recognizing that a contract was made

They exchanged price quote and a purchase order Documents are usually binding in the

construction industry They spent 6 months clarifying the project

Newcourt sent samples, drawings, details They left the terms of payment blank

So payment was either due upon deliver or whatever the general usage in the industry was

SO TO ASK FOR PAYMENT IN ADVANCE WAS A BREACH OF CONTRACT

Acceptance The UCC is different from the common law because it provides

greater flexibility in the way an acceptance can be communicatedo If the offeror doesn’t demand a clear method of acceptance, a

contract is formed when the offer is accepted in any reasonable manner

o An acceptance is valid even if the offeree includes additional terms or changes terms in the original offer (this is not considered a counteroffer)

Conflicting termso If an offeree’s form (terms) doesn’t match the offeror’s form

(terms), there is an acceptance But use the offeror’s terms unless special action is taken

o When terms in contracts conflict = battle of the forms Contract modification

o To make a contract modification, under the UCC, parties don’t need to provide new consideration, they just must pass the UCC’s test of good faith dealing

o Modification must be in writing CASE- Orkal Industries v. Array Connector Corp.

o Orkal- NY companyo Array- FL companyo Orkal bought products from Array

Okral would send purchase order forms Array would confirm the orders with a “customer order

acknowledgement form” These contained a “forum selection clause”

stating that in case of disputes, they would need to be brought to suit in Florida

Orkal did not object to the clauseo Orkal later sued Array in NY for breach of contracto Array gave a motion to dismiss due to their forum selection

clauseo The trial court agreed

Case was dismissed Said Orkal would have to sue in Florida

o Okral appealedo Additional terms become a part of the contract UNLESS:

Specifically objected to within a reasonable time OR Additional terms materially alter the contract

The party opposing the inclusion of the additional terms must prove that the additional terms are material changes

Inclusion of the forum selection clause constitutes a material alteration to the initial contracts

o Array could have made it binding if they had had Orkal sign their forum selection clause, but they didn’t so they lost.

Statue of Frauds: the sale of goods for more than $500 is not enforceable unless it is in writing and it has been signed by the party against whom enforcement is sought

Compared to the common law, the sufficiency of writing under the UCC is relaxed

o Not every material term needs to be specified Failure to respond to a writing

o Section 2-201(2)

If writing in confirmation of the contract is received it satisfies the writing requirement unless “written notice of objection” is within 10 days after the writing was received

Parol Evidenceo More relaxed under the UCC than the common lawo Section 2-202

Parol evidence (oral testimony) can not be used against written documents

However, it can be used to explain customary trade dealings or the meaning of certain terms

If the original document is intended to also be a complete and exclusive statement of the terms of the agreement than oral testimony cannot be used to change the terms

Filling the Gaps The UCC instructs the courts to fill in the parts of contracts that are

left either open and unclear Trade Usage: The regular practice and methods of dealings in a

given tradeo The UCC looks at this as well as past business dealings

between the parties to help resolve the current situation and determine the outcome of unclear terms

o The UCC will also apply the reasonableness standard Price

o If the price isn’t specified, 2-305 tells the courts to determine a “reasonable price”

Fair market value or past dealings may be used Quantity

o 2-306- when quantities aren’t clear Requirements contract: when the seller agrees to

provide all of a certain good that the buyer needs Ex) Michelin may agree to provide Ford with all

their tires on a certain model of cars, but Michelin doesn’t know how many tires that will be

Output contract: buyer agrees to take all of the output of a certain seller

Ex) Foot locker agrees to take all of the LeBron James shoes made by Nike, they don’t know how many of those Nike will produce

Delivery termso 2-309

Delivery must be within “a reasonable time”o 2-311

Seller has option for arrangements for shipmento 2-308

Presumes that delivery is to be at the seller’s place of business

CASE- Griffith v. Clear Lakes Trout Co.o Griffith was a trout growero Clear Lakes was a fish hatcheryo Clear Lakes had a 6 year contract with Griffith that he would

buy small trout from them, grow the trout, and sell them back to Clear Lakes when they were “market size”

o After 3 years, Clear Lake’s customers began to demand larger fish than the 12 oz ones Griffith was delivering

Clear Lakes was beginning to take fewer fish Griffith was left with too many fish

He became deeply in depth Griffith couldn’t easily change his operations

o Griffith sued Clear Lakes for breach of contract They weren’t accepting trout that Griffith had grown to

“market size”o Clear Lakes claimed no contract ever existed because the

parties differed as to what “market size” waso District court ruled for Griffith

Court held that both parties knew that “market size” was 12-16 oz when the contract was formed

o Clear Lakes appealedo HELD: affirmed

Both parties understood the market price

The parties intended to make a contract and the contract will not fail for indefiniteness

The course of performance between Griffith and Clear Lakes over the course of 3 years indicated that they had an understanding of “market size”

o The parties had a TRADE USAGE predating their contract

Performance and ObligationsSeller’s Rights and obligations

Tender: a valid and sufficient performance according to the contract

o 2-601 Deals with the seller’s delivery matching the terms of

the agreement If the goods don’t match the contract, the buyer may:

1. Reject the whole2. Accept the whole3. Accept some units and reject the rest

o The seller is obligated to tender goods at the buyer’s place of business

WHERE THE BUYER REJECTS, ACCEPTS, OR A COMBINATION OF BOTH ^^ (2-601)

o Perfect Tender rule: the seller must tender the quality, quantity, and delivery method as specified in the contract

If there’s no perfect tender the buyer can reject the foods and revoke the contract

Right to cure by the sellero 2-508

If there was an improper tender of goods, and the goods have been rejected by the buyer, the seller may cure the defective tender/delivery if all of the following are true:

1. The time for the sellers performance has not passed

2. The seller properly repairs/replaces the defective goods before the performance time has passed

3. The seller notifies the buyer in a timely manner that they intend to cure the defect

Buyer’s rights and obligations 2-507

o The buyer has a duty to accept conforming goods and pay for them according to the contract

2-513 Buyer’s right of inspectiono The buyer has the right to inspect goods before accepting

them 2-601 & 2-602 Buyer’s right of rejection

o The buyer can reject any non-conforming goods as a breach of contract and withhold payments

2-606 & 2-607 & 2-608 Buyer’s duty of acceptanceo 2-606 & 2-607

when the seller delivers conforming goods, the buyer has the duty to accept it and become to owner of the goods

o 2-608 If the goods have been accepted but are found to be

nonconforming, the buyer can later revoke their acceptance if the nonconformity “substantially impairs” the value of the goods

If the buyer is willing to accept the nonconforming goods they still must be paid for, but the parties may be able to negotiate a lower price

2-507 Obligation of paymento The buyer needs to pay for the goods when they are received

He is given the right to inspect them before paying

Sales WarrantiesWarranty: statement or representation made by a seller that the goods will meet a certain standard of quality, safety, performance, and title.

If they don’t, they may be held liable for damages, breach of warranty

Warranty of Title: the good title will be transferred to the buyer free of any claims against it unless they have been revealed to the buyer

2-312Express Warranty: created by a seller’s promise or guarantee to the quality, safety, performance, and durability of goods being sold

May be created by:o Showing a sample model so the buyer gets a feel for what the

goods will be likeo Describing attributes about the goods to the buyero Making specific oral or written statements (promises) to the

buyer Warranties may be disclaimed, but disclaimers need to be specific

to the type of warranty and must be conspicuouso An express warranty can be created if:

Claims are specific, statements are made about the goods that are not obvious, if it’s a case where the buyer has a good reason to rely on the seller’s expertise, or the statement is in writing

Implied Warranties: quality and safety standard Automatically imposed on sellers unless they specifically disclaim

them Implied warranty of merchantability

o Merchantability: the good must be at the same quality that is comparable to what would be generally acceptable in that line or trade

o The good must be able to do what is expected of it Ex) an umbrella must keep water off you

Implied warranty of fitness for a particular purposeo Fitness for a particular purpose: when the buyer relies on

the sellers expertise and the seller knows that Ex) you ask a painter for recommendations on what

paint wont chip on your new product. If the brand he recommends chips, you can sue for breach of implied warranty of fitness for a particular purpose

Warranty Disclaimers Sellers can make disclaimers but the language used needs to be

specific and the disclaimer needs to be conspicuous (no wishy washy language)

CASE- Lee v. R&K Marine Inc. Lee bought a new boat from R&K Marine

o Agreement had a disclaimer for all warranties, express or implied

This included implied warranty of merchantability or implied warranty of fitness for a particular purpose

3 years later, cracks and deterioration was discoveredo an appraiser determined this was due to manufacturing

defectso the boat was a total loss

The manufacturer was bankrupt, so Lee sued R&K claiming breach of warranties of merchantability and fitness for a particular purpose

Summery Judgement for R&K Lee appealed HELD: Affirmed

o The UCC 2-316(2) says that to exclude warranties of merchantability and fitness for particular purpose, writing must be conspicuous

The writing was in capital letters A reasonable person would have noticed it

Remedies and DamagesSellers Remedies

If the buyer breaches the contracts before receiving the goods, the seller may:

o Cancel the contracto Identify the goods

Minimize losses by stopping/completing production and salvaging the goods

o Withhold or stop deliveryo Resell the goods in a commercially reasonable mannero Sue the buyer for losses

If the buyer breaches the contract after receiving goods, the seller may:

o If the buyer doesn’t pay- sue for payment and damageso If the buyer wrongfully rejects-

If the seller reclaims the goods Remedies are the same as if the buyer had

breached before receiving the goods If the seller doesn’t reclaim the goods

Sue for payment and associated damagesBuyer’s remedies

If the seller breaches the contract before delivery,The buyer may:

o Cancel the contracto Get the goods from a different suppliero Sue the seller

If the seller doesn’t deliverThe buyer may:

o Cancel the contracto Get goods from another seller

Cover: when a seller fails to deliver goods, the buyer is entitle to buy substitute goods and recover the price difference from the seller

o Sue the seller If the seller delivers nonconforming goods and the buyer rejects,

The buyer may:o Cancel the contracto Get goods from another suppliero Sue the sellero Sell the rejected goods to recover their advance payments

If no advance payments were made they can store or reship the goods

If the seller delivers nonconforming goods and the buyer accepts,The buyer may:

o Deduct damages from the priceo Sue the seller for damageso Sue the seller for breach of warranty

Buyers damages Cover Incidental damages: Reasonable costs of inspecting, receiving,

transporting, and taking care of goods

Consequential damages: foreseeable damages that result from the seller’s breach

o May be a third party May not necessarily be the seller

CASE- QVC, Inc. v. MJC America, LTD QVC is a shopping network

o Offered soleus electric heaterso Soleus had them made in China

QVC sold 19,100 heaters in 2007-2008 The customers reported safety problems

o QVC stopped sales and had their project evaluated The conclusion was that there was problems with the

quality QVC ordered a recall

o They refunded their customers QVC’s contract with Soleus had strong warranty terms

o Held the seller responsible for all costs related to defects Including recall costs

Soleus disputed QVC sued District court awarded QVC

o Said Soleus breached warranty The purchase order said Soleus would indemnify (to stand in the

place of/defend) QVC from any damages and losses … based upon or resulting from … any alleged or actual defect

QVC sought damages for:o Cost price of heaterso Lost profitso Refunded customer shipping costso Shipping costso Center processing & recall costs

HELD: QVC was awarded damages

International SalesThe convention on contracts for the international sale of goods

CISG = Contracts for the International Sale of Goods Sales covered by the CISG

o The CISG applies to contracts for the commercial sale of goods that are made by parties who have places of business in different countries and have ratified the CISG

o Parties can specify whether they want to exclude the application of the CISG and choose another law to govern the contract instead

o CISG only convers sales between merchants Doesn’t cover sales to the public

o Sales that are excluded from the CISG Auction sales Consumer goods that are bought for personal or

household use Contracts that are primarily for labor or other services Electricity Ships and aircraft Securities

Stock Negotiable instruments Money

Similarities between CISG and the UCCo Formality

CISG doesn’t need to be formal or in writing Judges are told to look at the circumstances of

past dealings to see if there is a contract

o Offers CISG doesn’t consider advertisements to be offers Like the UCC, the court can fill in missing terms

o Acceptance Must be made within the time stated or within a

reasonable time Like the UCC and common law, silence is not an option By sending the good, that is reasonable means of

acceptingo Battle of the forms

According to the CISG, if there are differences within the forms that are material, the second form is considered a counter offer, not an acceptance

So there was no contracto Duties of parties

Like the UCC, CISG requires a seller to deliver goods with good title.

Like the UCC, CISG requires the buyer to notify the seller of defects within a reasonable time

o Remedies If there is a breach, parties are expected to behave in a

reasonable manner and give the breaching party an opportunity to cure the defect

Similar to common law Nachfrist notice (period of grace)

Like the UCC, if there is a failure to perform, there is an obligation to try and minimize the damages (duty to mitigate damages) so that the waste is minimized

CASE- Dingxi Longhai Dairy v. Becwood Technology Group Dingxi was in China Becwood was in Minnesota Dingxi agreed to ship 612 tons of inulin to Becwood 4 shipments went from Tianjin, China to Londonderry, NH Becwood received shipment 1 & 2

o They paid for 1o They refused to pay for 2 because there was mold on the

packaging Dingxi recalled shipments 3 & 4 before reaching their final

destination Becwood sued for breach of contract District court held for Dingxi on the second shipment and dismissed

Dingxi’s claims for damages that were related to shipments 3 & 4 The decision was appealed The contract was governed by CISG

o CISG elements of breach of contract: Formation Performance Breach Damages

Dingxi said it delivered all 4 shipments and Becwood didn’t pay for 2, 3, or 4

o They wanted money to pay for them plus costs and fees Becwood wanted the courts to dismiss Dingxi’s claims on shipments

3 & 4 because they recalled them before they reached the buyer and they said you cant recover damages for goods that never reached the buyer

The seller can recall their goods before they reach the buyer if the seller has breached the contract

o Dingxi said there was a breach of contract due to performance of contractual duty and Becwood refused to pay

Dingxi recalled the shipments before they reached the buyer, but Dingxi also proved that there was a breach of contract because Becwood didn’t pay

Court REVERSED dismissing Dingxi’s breach of contract claims regarding shipments 3 & 4

International Sales Disputes: The dominance of arbitration The UN encourages arbitration dealings through convention on the

recognition and enforcement of foreign arbitrable awards Most countries have adopted the convention

o If they have then the courts are bound to recognize and enforce arbitration decisions, as long as proper procedure was followed

o There is an exception if the procedure conflicts with one of parties nations’ laws or if they have gone beyond the scope of matter that is covered by arbitration

In the US, parties that have a contract written under CISG who require arbitration have little reason to be in court

o It’s the duty of the arbitrators to resolve the dispute under CISG rules

Ch. 12: Business Organizations 10/28/15 7:31 PMSole Proprietorships

Sole Proprietor: someone who is doing business for themselveso The business is called a sole proprietorshipo Usually owns all of the business propertyo Responsible for

Control Liabilities Management

o They may hire people, but they are responsible for their liabilities and debts as well

Capital comes from the owners own resources and is borrowed with the owner as a debtor

The owner is personally taxed for profits of the business How records are kept is up to the owners discretion

Partnerships Partnership: an association of two or more people to carry on a

business as co-owners for a profit General partners: share control over the business’ operations as

well as the business’ profitso They have equal control unless they agreed upon otherwise

Under most state laws, a partnership may be sued as an entity Most states have adopted two act’s to govern partnership law

o Uniform partnership act (UPA)o Revised Uniform partnership act (RUPA)

Forming a partnership It is not required for the partners to enter a formal agreement in

order for a partnership to existo Oral or implied agreements may suggest that a partnership

has been created

The courts prefer formal agreements, especially regarding finances, management, and dissolution issues

If the partnership does not have a specific agreement, the UPA governs the relationship

o “default rules” Duty of partners

o Fiduciary duty: partners need to act in good faith of their relationship for the benefit of the partnerships

Partners must place their personal interests below that of the partnership

o Latta v. Kilborn One party could not use the partnerships assets for their

own benefit Control by parties

o Unless stated otherwise, the profits of partnerships are divided equally

CASE- Zhou v. Bickleyo Bickley worked at a Yamaha shopo Zhou & Zhang were Chinese immigrants who worked at a

Chinese restauranto Bickley would eat lunch at the Chinese restaurant

Bickley told Zhou and Zhang that the Yamaha shop was going out of business

He suggested that they help him open a new motorcycle repair shop

o Bickley, Zhou, and Zhang signed a 2-yeat lease on a building for a motorcycle shop

Zhou & Zhang paid the security deposit, first months rent, and helped pay for inventory.

They also helped get the shop ready They also gave Bickley more money when he

asked for ito Zhou & Zhang asked for keys to the building

Bickley refusedo Zhou & Zhang asked to see invoices and receipts

Bickley refused

o Zhou & Zhang asked to work at the shop Bickley refused

o Zhou & Zhang demanded a written agreement Bickley refused An attorney sent a demanded letter on Zhou & Zhang’s

behalf Bickley ignored it

o Zhou & Zhang filed a lawsuit and demanded the return of their funds

o Bickley counterclaimed for breach on contract by his partnerso Trial court: there was never a partnership, only a vague

agreement to open a motorcycle repair shop Said Bickley operated as a sole proprietor who borrowed

money that he owed to Zhou & Zhango Bickley appealed

Just calling yourselves partners and referring to a business as a partnership doesn’t make you partners or make a partnership

Zhou, Zhang, and Bickley contributed money for expenses and signed a lease

No binding contract No partnership

A reasonable person could conclude that Zhou & Zhang intended to enter a partnership IN THE FUTURE

By Bickley denying Zhou & Zhang access to the building, access to financial records, and refusing to let them participate in the business, his actions WERE NOT CONSISTENT WITH A PARTNERSHIP

o An intent to do things which constitute a partnership determine whether or not the parties are partners

o AFFIRMED the parties did not do things that would constitute a partnership

Termination of the partnershipo A complete termination only happens after the partnership

has been dissolved and its affairs have been wound up

Dissolution: when an event takes place that makes it impossible for the partners to engage in any more business

Winding up: completing any unfinished business and then collecting & distributing the partnership’s assets

o Ways a dissolution can come about: Change in the composition of the partners

Results in a new partnership Withdrawal of a partner Death of a partner Bankruptchy of a partner

o If a partnership is terminated, the partnership must be reformed

Thus, why many partnerships purchase life insurance on partners

They used the proceeds to buy back the interest of the deceased partner from their estate

Limited Partnership Limited partnership: 2 or more people enter into an agreement to

carry on a business venture for a profito Unlike a general partnership, not all partners have the right to

participate in the management of the enterprise and not all are liable for partnership debts

Forming a limited partnership Partners MUST have a written agreement that is filed with the state,

called a certificate of limited partnershipo Puts third parties on notice that the limited partners assets

aren’t available to satisfy claims against the limited partnership

Relationship of the parties General partners:

o Manage the businesso Personally liable to creditorso Have the duty to account to the limited partners

Limited partners: INVESTORS ONLY

o Don’t manage the businesso Aren’t liable for debts beyond their contributions

Limited partners become general partners at law if the participate in or manage the business

Most states use some use one of these act’s to govern limited partnerships:

o The Uniform Limited Partnership Act (ULPA)o Revised uniform limited partnership act (RULPA)

CASE- Eagles Landing development LLC v. Eagles Landing Apartments, LP

o Eagles landing Development contracts to build apartments for eagles landing apartments for $1.4 million

o Apartment’s partners: General- Bluff city Limited- PNC Limited- Columbia (a corporation)

o Development completed the work, but was still owed $931,000

The agreement stated that Bluff City’s contribution wouldn’t exceed the net case flow from rental of the apartment

The cash flow was not good, so there was no money there

All of the cash that had been invested by Apartment’s was gone

o Development sued for Contribution by PNC and Columbiao Trial court HELD for development

Said Apartment’s owed $931,000o Apartment’s appealedo Columbia and PNC said that if the full developer’s fee is due

under the Development Agreement, they weren’t parties to it, they were only limited partners

Said they couldn’t be charged for any liability of the partnership under the Development Agreement

THE COURT AGREED

Unlike general partners, a LP protects partners registered as limited liability partnerships.

These partners are not liable Columbia and PNC were limited partners so

they cannot be held liable for partnership debts

o AFFIRMED the trial court’s judgment of the amount Apartment’s owed

o REVERSED the assessment of judgment to PNC and Columbiao REMAND to trial court for purpose of entering judgment only

against the partnership, Apartment’sTerminating a limited partnership

Death Insanity Withdrawal In a GENERAL partnership bankruptcy = termination, in a LIMITED

partnership bankruptcy DOES NOT = termination The organization must wind up the business The limited partners get their share of the profit and their capital

contributions before the general partners receive anything unless the agreement says otherwise

Corporations Corporation: an artificial person, or legal entity, that is created

under state law Can sue and be sued Has liability Has constitutional right

o Except for the privilege against self-incrimination Only officers & employees have the privilege against

self-incrimination Corporate charters: issued by the state and often grand special

privileges, so there is intense competition to receive themo Corporations must meet formal requirements according to

state statues Liable for agents actions and contracts

Each state has its own corporation lawso The federal government has a very limited role

Creating a corporation A corporation must send Articles of Incorporation and an application

to the appropriate state officeo This includes:

Name and address of the corporation Name and address of the corporation’s registered agent Purpose of the business The class(es) of stock that are to be issued and their par

value Names and addresses of the incorporators

o The state then issues a certificate of incorporationo The incorporators then hold their first organizational meeting

At the meeting they: Elect a board of directors Enact the corporations bylaws (:rules that

regulate and govern the internal operations of the corporations)

Bylaws cannot contradict the Articles of Incorporations

Issue the corporations stockRelationship of the parties

There’s an important legal separation of ownership and control in a corporation

o Ownership (the shareholders)o Control (the management & the board of directors)

3 major groups:1. Shareholders: own the corporation

Not responsible for managing the corporation Not allowed to exercise day-to-day control Elect the board of directors Vote on matters that change the corporation’s structure

or existence This happens at shareholder meetings

Quorum (:more than half of total shares) must be represented

Many shareholders give their proxy (: written authorization to cast their vote so that they do not need to attend) to third parties to represent them

Have no legal relationship with the creditors2. Board of Directors: the governing committee of a corporation

Have management power over large decisions Can be removed by the shareholders for a cause

Usually for breach of duty or misconduct They are the Principal (:on behalf of the corporation,

setting corporate policy and deciding on corporate business)

Business judgment rule: a rule that makes directors and managers immune from liability when problems result from honest mistakes in judgment as long as there is a reasonable basis for their decisions and they act in good faith

They have a fiduciary duty of loyalty (: directors need to place the interests of the corporation before their own interests) to the shareholders

3. Managers: appointed by the directors to manage the day-to-day business decisions

Have the same broad duties of care and loyalty as the directors do

o There are also employees who may be referred to as stakeholders but generally they are not a part of the basic legal structure of entity

CASE- Storetrax.com, Inc v. Gurlando Gurland founded storetrax.com

An internet-based commercial real estate listing service in Maryland in 1998

This was incorporated as a Delaware corporation in 1999

o Gurland agreed for a group of investors to buy majority share He became the president and a member of the Board of

Directorso Gurland’s contract said he had a year’s worth of pay incase he

was fired 2 years later he was removed as president, but

remained on the board for another yearo Gurland requested severance pay

He was deniedo Gurland suedo Board said he was not due severance pay because his job

duties, title, and salary changed They also said that as a board member, Gurland was

breaching a fiduciary duty by suing the companyo Lower court: HELD for Gurlando Storetrax appealedo AFFIRMED

There is a fiduciary duty of directors to the corporation, but sometimes there are situations when a corporate director may have an individual interest that conflicts with those of the corporation of the Board that hes on

When conflicting issued arise, the court looks to see if the directors dealings are in “good faith and fair dealing”

If a conflict arises a director can find a “safe harbor” by disclosing to the corporation the conflict and important facts to the remaining shareholders or directors

Gurland had a conflict as an aggrieved former employee and his duty as the director of the corporation

Gurland seeking severance pay was NOT in the corporations best interest BUT Gurland notified storetrax sufficiently of imminence of lawsuit

His notification gave him the protections of “safe harbor”

o HELD: Gurland received severance pay

Terminating the corporation Two parts:

1. Dissolution Voluntary

Involved approval of the shareholders and the board of directors

Articles of dissolution are filed with the state Involuntary

Dissolved by the state Can be done through bankruptcy

2. Winding-up phase After the affairs have been completed, the assets are

liquidated Businesses need to pay the creditors first then the

rest is distributed to the shareholdersClose corporation

Allowed by 20 states Sometimes called a “statutory close corporation” to distinguish it

from a “closely held corporation” NOT THE SAME THING There are a limited number of shareholders

o 30-50 Shares are not openly sold

o So there is a limited market for them Shareholder have to have an agreement that governs the affairs of

the corporation These corporations are not subject to formal rules regarding

shareholder and director meetingso This is different from regular corporations

S Corporation Regular corporations (C corporations) can elect with the IRS to be a

S corporation Can only have 1 class of stock Cannot have more than 100 shareholders

o Only natural persons (US citizens or legal residents) can be shareholders

Other corporations or partnerships cannot be shareholders

Primarily used for tax considerationso Don’t pay taxeso Profits and losses must be allocated to the shareholders who

pay income taxes Popular among smaller businesses

Professional corporations Created by state laws Owners of a professional corporation can only be professionals

involved in the firm itselfo Ex) MD’s whose practices are tied together

Created so members have limited liabilityo Ex) Dr’s join together to reduce liability risk for malpractice of

a member-DR Stock isn’t usually sold to outside investors Gets special tax treatment with the IRS

Benefit corporation this is a new class of corporation it voluntarily meets high standards of purpose, accountability, and

transparency Characteristics:

o The corporate purpose is to create a material positive impact on society and the environment

o Is required to consider the impact of their decisions on shareholders, workers, the community, and the environment

o Is required to make an annual benefit report that assesses their overall social and environmental performance against a third-party standard available to the public

This type of corporation allows its leadership greater leeway in making decisions that may not comport with the traditional standard of maximizing financial interests of the firm

Limited Liability Companies

Limited Liability company: a business organization that is treated like a corporation for liability purposes, but like a partnership for federal tax purposes

Method of creations State laws have procedures to create LLC

o File an Articles of Organization Then the state will issue a certificate that will allow for

the business to operate as a LLCRelationship to the parties

Usually formed by 2 or more members The members have a membership interest in the company The owners have limited liability (like a corporation) The members enter into an operating agreement (: provides rules

about the operation of the company and the relationship of the members. It establishes the company’s method of management, allocation of profits/losses among members, restrictions on the transfer of membership interests, and the process to be followed in dissolving the company)

o This is similar to the bylaws that a corporation createsThe continuity-of-life factor

An LLC does not have a perpetual life A member’s membership is terminated if death, bankruptcy,

retirement, resignation, and expulsion of the member occurso But if the rest of the members give their consent, the LLC can

continueTermination

Winding up period Pay the creditors Distribut the profits

CASE- In Re 1545 Ocean Avenue, LLC 1545 Ocean Avenue LLC was formed for a real estate project

o It was owned 50-50 by 2 companies: Ocean Suffolk Crown royal

Each company had membership certificate in 1545o The operating agreement had no dissolution provisions

Two managers were appointed to operate 1545:o Crown Royal- Kingo Ocean Suffolk- Van Houten

King & Van Houten arguedo King announced that Crown Royal would pull out

King sued for the work to stop and for the LLC to be dissolved Trial court granted King’s requests Ocean Suffolk (and Van Houten) appealed NY’s LLC law states that a court must examine the LLC’s operating

agreement One sided (unilateral) action of one manager was permitted in an

article of 1545’s operating agreemento Lets each manager act independently to bind LLC in

furtherance of business of the LLC The operating agreement didn’t say anything about manager

conflicts 1545 can only be dissolved if it cannot further purpose the LLC Lower court ruling was REVERSED

o The dissolution was NOT granted

Key Organizational features Factors that influence the choice of business organization

o Limited liabilityo Controlo Capital considerationso Taxationo Transferability of ownership interestso Method of creationo Entity as a distinct status separate from its ownero Each owner must make his/her own choice

Limited Liability Allows a person to invest in a business without placing their

personal wealth at risk Allows investors to be passive towards the internal management of

the business

Sole proprietors and general partners have unlimited personal liability for debts of the business

The liability of a limited partner is limited to the capital that they contribute to the limited partnership

Shareholders and members only risk their capital investment if the corporation fails

o General they are not personally liable for the business debts or torts

“piercing the corporate veil”o When the court finds that the corporation is a sham

The owners intend to operate the business as a proprietorship or partnership

o The court can impose liabilities on the shareholders (owners) when there is fraud, undercapitalization, or failure to follow corporate formalities.

The shareholders can become personally liable for all corporate liabilities

Torts Contracts Debts

o CASE- KC Roofing Center v. On top Roofing, Inc The Nugent’s owned a series of roofing companies.

Russell & his wife were the only shareholders, directors, and officers

1977- Russell Nugent Roofing, Inc 1985- On Top Roofing

1987 ceased doing business 1987- Nugent started new corporation- RNR, Inc 1988- RLN Construction, Inc 1989- Russell Nugent, Inc The business was run out of Nugent’s home In 1986 the Nugent’s were paying themselves over

$100,000 each They were charging the corporation $99,290 for

office rental space, which was in their own home

KC roofing was owed $45,000 for roofing supplies they sold to On Top Roofing

KC asked the court to pierce the corporate veil and hold the Nugent’s personally liable

District: HELD for KC Nugents appealed HELD: AFFIRMED

When a corporation is used for improper purpose, to perpetuate injustice, and avoid its legal obligations, the corporate veil is pierced

Nugents had control of ALL ASPECTS of the business

Control was used to commit wrong legal duty/fraud

A breach of duty caused an unjust loss to the plaintiff

The Nugent’s were avoiding debts to plaintiff They reused On Top’s obligations to creditors This was unfair, unjust, and inequitable of Nugent

to hide behind the corporate shield and avoid legal obligations to plaintiffs

Transferability of Ownership interests The ability of an owner in a business to sell or pass interest to

others Non traded entities

o Sole proprietorship Selling the business ends the existing proprietorship

and initiates the creation of a new one Hard to price

Price is future market value to be determinedo Partnerships

If a partner sells or assigns their interest in the partnership, the partnership continues, but the new person does not automatically become a partner

They just receive the share of the profits that the partner would have received

They cannot participate in management of the partnership or gain right to any partnership information without permission of other partners

Duration Refers to the ability of a business to continue to operate in the

event of a death, retirement, or other incapacity of an owner of the business

Sole proprietorshipo Terminates with the death or incapacity of the proprietor

Partnershipo The partnership is dissolved by death, retirement, or

incapacity of a partner, but this does not mean that the partnership is necessarily terminated

Corporationo Unless its articles of incorporation specify a period of duration,

a corporation has the potential of perpetual existence Death or retirement of a shareholder doesn’t bring

termination to a corporation In fact, it usually has no impact on the corporation

Franchises Franchise: whenever a franchisee is granted the right to sell goods

or services by a franchisor according to a marketing plan in return of the payment of a franchise fee

Uniform product or services and the use of a trademark help the franchisee quickly establish themselves in the market

Types of franchises Product distributorships

o Franchisee has the right to sell the product of the parent company

Ex) car dealership Trademark/trade-name licensing

o Franchisee has a license to market the company’s brands Ex) Coca-Cola

Business format franchising

o Franchisee follows the business model set out by the parent company

Ex) McDonaldsThe Law of Franchising

Federal and state laws are intended to protect investors from crooked or unethical operations

The FTC Franchise Ruleo Federal Trade Commission Franchise Ruleo The Franchisor is required to give an offering circular (a

detailed disclosure document) to potential franchiseeso FTC v. Wealth Systems, Inc

FTC alleged that 3 entities violated section 5 in selling home-based internet business opportunity by misrepresented purchases will earn substantial income

o When violations occur, the result is usually that the activity is closed down

State Regulationo Some states have laws to regulate franchises as wello Many states have business opportunity disclosure filing

requirementso Most states use the Uniform Franchise Offering Circular

(UFOC) as the basis for reportingo State agencies have the authority to investigate franchise

fraud among other bad business practiceso Some franchises are given extra protection by state laws

Ex) auto dealers and gas stationsThe Franchise Agreement

The Franchise agreement: sets forth the rights and obligations of the franchisor and the franchisee

o Territorial rights Area where the franchise can be set up

o Fees Advertising fees Upfront fees

o Royalties

A percentage of annual sales that the franchisor will take

o Termination Franchise agreements usually are explicit about events

that could cause the franchise’s termination The franchise could have a fixed expiration time The franchisor usually has the right to terminate upon

the occurrence of events Possibly inspection problems, violation of

franchisee, bankruptcy CASE- Dunkin Donuts Franchised Restaurants v. Sanlip

o 3 individuals owned Sanlip, Inc (which was a DD franchise)o they operated 2 shops in Norcross, GAo DD said the defendants breached franchise agreements

Failed to remodel their shops Failed to participate in mandatory system-wide

programs Failed to attend required training Failed to prepare immigration forms for new employees

o DD said the defendant transferred significant parts of the franchise without DD’s knowledge

This was in violation of the franchise agreemento Sanlip didn’t dispute the claims

Said DD wasn’t allowing the owners a reasonable chance to sell the franchise

o DD entered a settlement agreement to allow Sanlip time to find a buyer

o Sanlip submitted a proposed sale agreement DD wouldn’t accept the buyer

o DD asked courts to order Sanlip to return the shop to DDo Sanlip counterclaimed that DD had rejected a reasonable

proposal for someone else to take the shopo HELD in favor of DD

DD cannot “unreasonably” reject the proposed sale agreement

DD said if the store will lose money, DD will reject the proposed sale agreement

DD looks at the financial condition of the buyer ^^this is a firmly-established policy by DD and it is

REASONABLEo DD has the right to terminate the agreemento The lease agreements say DD may terminate the lease if the

franchise agreement for the shop is terminated

Ch. 13: Negotiable Instruments, Credit, and Bankruptcy 10/28/15 7:31 PM

Negotiable Instruments Negotiable instrument: a written promise or order to pay a

certain sum of moneyFunctions of negotiable instruments

Can be a substitute for casho ex) checks

Provides a way for credit to be extended to debtorso Ex) promissory note

Types of negotiable instruments: 3rd party instruments used instead of cash and as a credit device

o orders to pay- draftso orders to pay- checks

2nd party instruments used as a credit deviceo promises to pay- noteso promises to pay- certificates of deposit

The concept of negotiability Once issued, a negotiable instrument can be transferred to another

partyo Instrument has been ASSIGNED

Assignee has the same rights and responsibilities as the assignor

o Instrument has been TRANSFERRED BY NEGOTIATION Transferee takes the instrument free of any of the

transferor’s contract obligations (responsibilities) Transfer order instruments pay:

o Payee endorses and delivers instrument to third party Bearer instruments: the party in possession is only required to

deliver the instrument in order to transfer ito The drawer (maker) could create it “to bearer”, “to the order

of bearer”, “payable to bearer”, “to cash”, “pay to the order of cash”

o This is risk if its lost, anyone who finds it can cash ito The transfer of a bearer instrument is by delivery

Requirements for negotiable instruments Only negotiable instruments fall under the UCC

o If an instrument is nonnegotiable, the common law of contracts applies

For an item to be negotiable it must:o Be writteno Be an unconditional order or promise to payo Be signed by the maker/drawero Be payable on demand or at a specific timeo Be made out “payable to the order” (order paper) or “to

bearer” (bearer paper)o State a certain sum of money

Requirements for Holders in due course A person in possession of a negotiable instrument may:

o An ordinary holder Same contract responsibilities as an assignee under a

nonnegotiable instrumento Holder in due course: the transferee must:

Give value for the negotiable instrument Take the instrument without the knowledge that it is

overdue or defective Take the instrument in good faith

A transferee could be an ordinary holder who transforms into a holder in due course

o Ex) Pam buys a car wash franchise from Tammy. Pam writes Tammy a check. After Pam owns it she learns its going bankrupt. Pam goes to cancel her check but Tammy has already transferred it to Andy. The bank pays Andy when he presents the check and even though Tammy defrauded Pam, Andy has no obligation to repay Pam.

Major Types of Negotiable instruments Orders to pay- 3 party instruments used instead of cash as credit

devices

o Drawer: issues/creates the document that requests paymento Drawee: the one who makes the payment, owes payment to

the drawero Payee (beneficiary): the party who receives the paymento Ex) You buy furniture from a Thai companyo You are the drawer because you need to get money out to

make the paymento The bank is the drawee because they are the ones you have

instructed to make the paymento The Thai company is the payee because they are receiving a

payment1. Drafts

Drafts: a binding order to pay a fixed sum of money Unconditional written promises to pay

The drawer orders the drawee to pay money to the payee

Time draft: says a specified time usually in the future

Often used to ensure goods are delivered Sight draft: draft that requires immediate

payment by the drawee to the payee Sales draft: for the sale of goods Bill of exchange: when a draft guarantees payments

for goods in international trade Bankers acceptance: a guarantee by the bank that a

draft is legitimate and the drawee has sufficient funds to cover it

2. Checks Check: a draft drawn on a bank and payable on

demand Most common form of a draft, but unlike a draft a check

must be paid on demand Used to be the major method of payment

Now credit cards and debts have replaced them because it reduced the problems that businesses would go to cash checks and the consumer would not have sufficient funds in their account

Cashiers check: a form of check where the bank is both the drawer and drawee

Promises to pay- 2 party instruments that are used as credit deviceso Maker: person who promises to pay someoneo Payee: person who should receive the money

3. Notes Note: a commercial paper that is a promise by the

maker to pay money to the payee Usually called a promissory note There are also:

Collateral notes: when personal property is used as collateral to back up a loan

Real estate mortgage note: when real estate is used as collateral to secure the loan

Installment note: when the maker promises to repay the note in specific installments

Balloon note: installment payments that are often only on the interest owed

o 4. Certificates of deposit Certificates of deposit: an acknowledgement by the

bank that it has received money from the customer with a promise that they will repay the money received at a date specified or, in some cases, on demand

The bank is the maker The customer is the payee Most large CD’s are negotiable

This allows them to be sold, used to pay debts, or used as collateral

CASE- Associated home and RV sales v. Bank of Beleno Associated home and RV sales sells vehicles under the trade

name “enchantment” They hired Ramos to assist with their book keeping

o In 20 months, Ramos forged 211 checks payable to either herself of “to cash” equaling $283,547 that was stolen from Enchantment

o Enchantment found out and notified the bank of Beleno The bank refused to cover the losses

They said they had been sending enchantment monthly statements, including photocopies of cancelled checks

o Enchantment sued the bank for common law fraud and negligence and negligence under the UCC

o The trial court granted summary judgment to the banko Enchantment appealedo The UCC states that usually common law principles are not

upheld in an area that is covered by the UCCo UCC says that a forged or altered check is not properly

payable The bank is strictly liable for the losses to its customer

o UCC also says that a bank may seek “safe harbor” from strict liability if it makes bank statements available to the customer

The customer can identify the forgery The customer must be reasonably prompt in notifying

the bank Within 30 days of receiving the statement

If this occurs the bank IS strictly liable After a 30 day period the bank is only liable if the

customer was able to prove that the bank failed to exercise “ordinary care” in passing the forged item and the bank “substantially contributed to the loss

Loss is then divided between the customer and the bank based on comparative negligence

Regardless, if a year or more has passed since the customer has received the statement, the customer cannot bring the claim under the UCC, they just must bear the costs

o In this case the UCC provides scheme for liability and defenses

o HELD Enchantment was, however, entitled to try and prove a

lack of ordinary care by the bank within 1 year of them alerting the bank of the forged checks

o If the bank sent statements to Ramos, who was an employee, this is a “reasonable manner” of notification to Enchantment

o HELD: summary judge reversed the UCC negligence issue Said Enchantment did the minimum necessary to raise

issues of fact that jury may view. The jury can then determine whether the bank

breached its duty of ordinary care to enchantmento BOTTOM LINE: Enchantment doesn’t get their money back

Credit Creditor: the person who lends the money or allows goods/services

to be purchased on credit Debtor: the one who the money is lent to Principal: the sum of the debt that is owed Equity financing: the sale of stock in the company or the sale of

negotiable instruments that are subject to securities regulation Debt financing: borrowing money according to a contract

Credit policy Focuses on the following characteristics:

o Capacity The debtors ability to pay

o Capital The debtors financial condition

o Character The debtors reputation

o Collateral The debtors assets to secure the debt

o Conditions The economic situation affecting the debtors business

This information can be found from consumer reports and credit ratings

o Credit reports are not always accurate Credit accounts

o Open account: when payment is expected within a fixed time period

o Installment account: repaying through regular (usually monthly) payments

o Revolving account: making a minimum payment and more debt can be added to the account overtime

Collections policyo This is needed for debtors who fail to make timely paymentso First- send a past due letter/emailo Next- follow up with a telephone call or second lettero Finally- a personal visit may occuro Additional action may be necessary depending whether the

customer is secured or unsecured Unsecured creditor: a party who owes money but has

no security to secure the debt Secured creditor: a party who has the ability to take

some of the nonpaying customers’ property to satisfy the debt

o If a person in debt (debtor) proves to be insolvent (unable to pay), the creditor will receive nothing

Credit with security Collateral: debtors property that is taken away by a creditor to

satisfy debto Can happen by:

Agreement with the debtor Operation of the law

By agreement Depends whether the property is real (immovable, i.e. a house) or

personal (movable, i.e. a bracelet) Suretyship: a promise by a third party to pay the debt if the debtor

doesn’t

Guarantor: provides a guarantee of payment to the creditor if the principal debtor pails to pay

Defenses of suretieso Surety: the third party who promises to be responsible for

the borrowers payment obligations or performance to a creditor

o Debt falls under contract law So it has the same defenses that the principal (debtor)

has Impossibility Illegality Duress Fraud

Surety’s rights against the principalo Exoneration: when the court orders for the principal to pay

Surety is entitled to this when the borrower could pay the creditor but refuses to

o Surety is also entitled to Subrogation: the rights of the creditor against the debtor

CASE- Business Financial Services v. Silvermano Warren park partners, LTD borrowed $34.8 million from GE

financial They used this to buy land in Texas

o When the loan was made, Silverman and his partners signed a guarantee, guaranteeing full payment

o Warren park defaulted and went into bankruptcyo GE demanded payment from Silverman

Silverman didn’t pay GE sued

o Silverman claimed affirmative defenses of: Fraud Extortion Theft Economic duress

o Hours before signing the documents, GE notified Silverman of changes in the terms of the agreement

They had no time to contest because the loan was needed immediately

Silverman signed because he felt trappedo Silverman claimed GS told him the new terms would not be

enforcedo GE moved for summary judgmento HELD summary judgment for GE

GE offered evidence of both claims that defendants did not contest

GE argued that even if the affirmative defenses Silverman was claiming are true, the allegations are barred by the credit agreement act (ICAA)

The ICAA bars all actions of defenses by a debtor based on oral arguments

The defendants didn’t dispute that they made “credit agreements”

Defendants said that ICAA does not bar thir affirmative defenses

o Argue “unclean hands” of GEo The court was not swayed because oral promises y GE

contradict the terms of counts I and II The ICAA bars the defendant’s affirmative defenses

o Silverman loses Secured transactions

o When goods are sold the UCC provides that the goods may secure the debtor’s obligation to pay

Governs the commercial sale of goods (but not real estate)

o To make a security interest more easily enforceable, the seller must create the interest, or legal right, and make sure that the interest is attached and perfected. Be sure it is:

Attached (attachment) Must be:

Signed by the customer Seller must have provided value

Customer must have legal, transferrable rights in the collateral

Perfected (perfection) Filed with the proper official

o Interests in inventory Tangible property: goods that are movable at the

time the security interest attaches Purchase money security: the security interest that

the lender extending credit to a business obtains As collateral, equipment, inventory, raw materials (all

tangible property) are used as securityo A “Floating Lien” for inventory

Under the UCC, inventory includes goods that are being held for sale as well as raw materials

Inventory is constantly changing Floating lien: a security interest that is retained in

collateral, even when the collateral changes in character, classification, or location. An inventory loan in which the lender receives a security interest or general claim on a company’s inventory. Under the UCC, such security is not only in inventory or accounts of the debtor at the time of the original loan, but also in inventory or accounts acquired after the loan

Default by debtoro Some property may be exempt

Ex) homestead exemption: when personal assets have been placed as collateral

Homestead law: an exemption that allows the debtor to retain the family home up to a specified amount free from creditors claims

o Default: when the buyer doesn’t repayo A creditor make take the goods and keep them or they can

resell them. But if the product is resold it must be done in a

“commercially reasonable manner”

Any excess from a sale of repossessed property over debt owed must be returned to the debtor

CASE- Fordyce bank & Trust v. Bean Timerland, Inco Fordyce bank made loans to Bean Timberland so it could buy

timber from land ownerso Bean would cut the timber and sell logs to P&Io The proceeds Bean’s made would repay its loanso The bank perfected its interest by filing UCC financing

statements with the Secretary of State’s office in AKo Bean sold the timber, but failed to pay the loans

Bean went bankrupto Bank sued P&I because it had priority interest in the timber

sale proceeds Bank said P&I was negligent in its dealings for failing to

do a lien search and did not “exercise good faith” required under the UCC

o Trial court held for P&I Said they were not negligent Said they were not required to perform a security

interest search in the “ordinary course of business”o The bank appealedo AK UCC- a buyer in the ordinary course of business takes free

of a security interest created by the buyer’s seller, even if the security interest is perfected by the bank and the buyer knows of its existence

Since P&I were buyers in “ordinary course of business” they had no duty to perform a lien search even if they knew of the bank’s security interest

o AFFIRMED Not doing a lien search is standard timber industry

practice P&I were just buyers in the “ordinary course of

business”Real Estate Financing

Mortgage: real estate is used to secure a debt obligation evidence by a mortgage

Mortgager: debtor Mortgagee: creditor Mortgage is a lien in most states In the case of a default, the mortgagee has the right to foreclose a

property deficiency judgment: if proceeds from a foreclosure are not

sufficient, a separate legal action against the debtor is maintained Non-recourse debt: a lender can seize the collateral (property)

but not seek a deficiency judgment for money owned that is not covered by the sale of property

o Most mortgages are this Statutory redemption: the period of time that the mortgagor has

the right to redeem the property by paying the debto Normally within 6 months after defaulto Most states have this procedure

Liens Lien: a security obtained by a creditor through the law Nonconsensual lien: seller may get it without a specific

agreement with the customero Obtained by operation of law no need for debtor’s consent

The procedures for liens are mostly determined by state statues Mechanic’s lien: the party that furnished material, labor, or series

for construction or repair of building or other real property can place the lien on the property for unpaid bills

Possessory lien (artisan’s lien): a party can add value to cared for personal property

Court-decreed liens:o Attachment lien: a court ordered seizure of goods from a

customer to prevent them from disposing of the goods This is done through a writ of attachment

o Judgment lien: occurs when a creditor has successful action against a debtor

Writ of execution: what the creditor asks the court for if the debtor doesn’t pay judgment

Bankruptcy

Bankruptcy: when someone’s assets gets distributed to creditors and they reorganize their debt structure

Purpose:o Orderly resolution where debtors owe more than what can be

paid Federal bankruptcy code has been rewritten

o Most recent- The bankruptcy abuse prevention and consumer protection act of 2005

Most bankruptcies involve individual A person must take credit counseling before filing bankruptcy

o After filing bankruptcy there must be a debtor education about budgeting, use of credit, etc

KEY FEATURE: Fair treatment of creditorsPersonal bankruptcy

Creditors do not usually get paid The department of justice’s US trustee program approves

organizations to provide mandatory credit counseling & debtor education

CREDIT COUNSELING->before DEBTOR EDUCATION->after Income and means testing

o Income test determines if a person should file under chapter 7 (liquidation) or chapter 13 (reorganization of debts)

o People with a higher income are less likely to have their debts extinguished

o There is a test of income against expenditures This is to see if a person is living above average for a

given income levelChapter 7

Most bankruptcies are voluntary, but creditors may force an involuntary proceeding

o Voluntary bankruptcy: filed by either an individual or business debtor

o Involuntary bankruptcy: creditors file a petition with the court to force a declaration of bankruptcy and the beginning of proceedings

Some assets are exempto Carso Clothingo Applianceso Some home equity and pension

Upon filing, there is a freeze on actions against the debtor and their property

A trustee is appointed to administer the debtor’s estate Assets are liquidated and the proceeds are distributed to creditors After discharge, the debtor is not liable for debts covered by

proceedings Liquidation and fair distribution of debtor’s non-exempt assets to

creditorsChapter 13

Available only to individuals Only available as a voluntary option

o Sole proprietorship owned by an individual may file under chapter 13

Debtor files plan for payment of creditors over time (usually 4 years)

Debtor keeps property and shares administration of the bankrupt estate with court-appointed trustee

Trustee makes sure that the payments are made and that creditors don’t try to get around their fixed payment schedule

Court protected debt repayment plano The confirmation plan that was approved makes these

payments The debts of those bankrupt are not discharged Long-term secured debt is treated differently

o Ex) house mortgage If this plan fails than possibly shift to chapter 7 for hardship

dischargeThe Bankruptcy proceeding

Priority classes of creditorso Certain creditors take priority over others in receiving shares

of the debtors assets to pay for debts owed to them

1. Secured creditors2. Costs of preserving and administering the debtor’s

estate3. Unpaid wage claims4. Certain claims of farmers and fishermen5. Refund of security deposits6. Alimony and child support7. Taxes8. General (unsecured) creditors who can file a proof of

claimo All creditors of a particular class must be paid before the next

lowest priority creditors can be paid anythingChapter 11

Allowing a business to keep operating without liquidation of assets “prepackaged” bankruptcy filings

o debtor & creditors settle issues before the debtor fileso the court then approves

reorganizationso this filing automatically stays further financial action by the

creditorso debtor in possession: the debtor acts as the trustee to run

business for benefit of all partieso the creditors are satisfied by class in order of priority of claims