Law Study Guide Ch32 p638-648
Ch34 p680-689 p691-703 Secured Transactions in Personal Property 1. Definitions
a. Secured transaction – created by giving the creditor a security interest in that property
i. Security interest – property right that enables the creditor to take possession of the property if the debtor does not pay the amount owed.
b. The property sunject to the security interest is called Collateral c. The parties
i. Creditor/secured party – person to whom money is owed ii.Debtor – borrower
d. Nature of creditors interest – creditor does NOT own the collateral but the security interest is a property right. It can ripen into possession and right to transfer title by sale.
i. Creditor owes duty of due care
e. Nature of debtors interest – owns the collateral and can recover damages for the loss/improper seizure of the property or damage to it
2. Creation of a security interest – the following three conditions must occur for the creation of a security interest. Can occur in any order. Security interest attaches whne the last of the conditions has been met.
a. Agreement
i. Must identify the parties, contain a reasonable description of the collateral, indicate the parties intent tht the creditor have a security interest in it, describe the debt and be authenticated by the debtor
ii.No signature is required (electronic ok) and debtors actions can indicate an understanding of the agreement iii.Reasonable identification of collateral- specific listing,
quantity, category or formula
1. “all proprety” wont work but “livestock” would 2. requirement is more strict for consumer goods iv.Oral vs written
1. Oral ok if creditor has possession of collateral 2. Record necessary if not
v.Field warehousing- oral agreement – banks possess an account but cannot use w/o position from account holder b. Value Given
i. Creditor can led money or deliver goods on credit
ii.Can be a current exchange or given previously as a loan 1. Common when creditors get nervous
i. Debtor must have rights in the collateral
ii.Security cant attach until goods delivered fob shipping reach the buyer
3. Purchase money interest
a. When seller sells on credit and is given security interest in the goods sold – called a purchase money securirty interest (PMSI) b. Special property rights given in some circumstances
4. Nature and classification of collateral
a. Nature/classification affect the procedural obligaitons and rights of creditors
b. Consumer goods – used or bought for use primarily for personal, family or household purspose.
c. After-acquired collateral and ongoing credit – creditors rights can cover future loand and acquisitions of collateral
i. Also called a floating lien – crediors security interest covers the inventory regardless of form or time of arrival in
relation to the attachement of the security interest.
ii.Restricted in consumer credit ocntracts – can only cover goods acquired by the debtor within 10 days after creditor gave value to the debtor
d. Proceeds – whatever is received upon the sale, echange, collection or other dispotion of collateral.
i. Collateral can change form and character during course of agreement
ii.Insurance money is proceeds
1. Automatically subject to creditors security interest unless security agreement provides to the contractry iii.Can be in any form – cahs, checks, notes, other prorprty e. Electronic chattel paper – property or funds in an electronic
medium
5. Perfection of secured interests
a. Attachement of a secured interest gives the credit rights of enforencment of the debt through repossession of the collateral b. Multiple debtors have haold an attached security interest in the
same collateral
c. Perfected security interest enjoyrs priortity over unperfected and sometimes over oteher perfected interested
d. Still valid if unperfected, just helps to perfect 6. Perfection by creditors possession
a. Automatic perfecticon if the creditor has possession of the collateral – until the time it is surrendered
b. Field warehousing- creditor has agent at buyers place of business 7. Perfection for consumer goods
a. PMSI in consumer goods is automatically perfected b. Simplified by the UCC bc so many consumer goods are
c. Perfection may be destroyed by debtors resale to a consumer who does not know of the security interest
8. Perfection for health care receievabels
a. Automatic perfection when consumer givers a creditor a security interest n forthcoming health insurance proceeds
9. Authomatic perfection
a. Random oher situations such as bundled software 10.Temporary perfection
a. Generally 4 month period to refile financing statement in new state a debtor moves to
i. Most agreements provide failure of debtor to notify the creditor of a move is a default on the agreement
b. 20 day temporary perfection in negotiable instruments i. must perfect after by filing financing statement or
possession 11.perfection by control
a. if debtor cannot use the collateral without permission from the party holding the control (bank releasing payments)
12.perfection for motor vehicles – must be noted on title registration 13.perfection by filing financing statement (UCC1)
a. authenticated record that gives sufficient info to alert third periods that a patircular creditor may have a security interest in the collateral
i. old article 9 – must be written/signed by debtor ii.revised article 9 – creditor must be able to show
documents were authoried and authenticated – no signature necessary
1. debtor could authenticate the security agreement 2. debtor may become bound under a security
agreement, agreeing to allow financing statements to be filed on the cllacteral
3. debtor acquires collateral subject to a security agrmnt
b. unauthorized or w/o one of any 1 of the above 3 requirments does not provide the creditor perfected status
c. content of financing statement – name of debtor, name of secured party, collateral description, address
d. must spell debtors name correctly so other ppl can know the debts exist
e. must be filed in a public place-
f. defective filing – if its erroneous or incomplete or wrong country or office, no perfection is acquired.
14.Loss of perfection – can be lost if creditor does not comply with article 9 requirements for continuing perfection
a. Possision of collateral – if creditor voluntarily surrenders the collateral to the debtor without any restrictions
b. Cosnumers goods – lost by removal of goods to another state, if resold to unknowing buyer.
i. Can protect against these by filing fancinaing statement ii.PMSI still good against other creidtos but not the buyers c. Lapse of time
i. Perfection by financinc statmenet last 5 years ii.Can continue another 5 years if filed continuation
statement within 6 months of the end of the first 5 year period
iii.Mobile homes – 30 year perfection automatically
d. Removal from state- creditor must make filing in section state within the four month period of temporary perfection
e. Motor vehicles – remains perfected without regard to lapse or time or removal to another state. Only lose if a state issues new tiles w/o security interest notation
15.Rights of the parties before default a. Statement of account –
i. debtor may send creditor a written statement of amount the debtor thinks is due and an itemization of the collateral – with a request the creditor approve/return the statement ii.Creditor must approve or correct statement within 2 weeks
of receipt
iii.If secured creditor has assigned the cliam – creditor must indicate name and address of the assignee
b. Termination statements
i. Detor who paid debt in full can demand a termination statement stating security interest is no longer claimed ii.Debtor can the present to filing officer who marks record
terminated
iii.Creditor has 20 days from receipt to file the termination statement (one month for consumer goods)
c. Correction statements
i. Debtors can protest filed finainc statements with filing of their own orrection statemnts (or if termination statement is not provided)
16.Priorities
a. Two parties may have conflicted interests in the same collateral b. Unsecured vs unsecured party
i. Equal priorirty- end of th line in terms of repayment ii.Receive pro rate share of their debts based on leftovers c. Secured vs unsecured
i. Secured has superior right
ii.If the collateral is insufficient to satisfy the debt, the decured ebtor can stand in line with sunsecured reditors and collat a pro rata share of remaining sdebt
i. First in time provision – whoevers interst attached first ii.Whoever isn’t first can wait in line with the unsecured, as
the specific collateral was given to the first attachement e. Perfected secured vs secured party
i. Perfected takes priority
ii.Unperfected becomes regular unsecured b/c collateral was given to perfeted creditor
iii.Perfected secured partes interst vs other credits such a lienors, mortagees and jusgment creditos is determined on a first to perfet basis.
f. Perfected secured vs perfected secured i. First in teime rule but three exceptions
1. PMSI in inventory
a. If collateral is inventory, PMSI creditor must do two things to prevail
i. Perfect bfore the debtor receives possession of the goods that will be inventory
ii.Giver notice to any other secured party who has previously filed a finaniclng statement with respect to that inventory b. Rationale allows for businesses to replensihe
their inventory by giving new suppliers a higher priority
2. PMSI in noninventory collateral such as equipment a. PMSI prevail over all other as to the same
collateral if the creitor files a financing statement within 20 days after debtor takes posseion of the collateral
3. Status of repair or storage lien
a. A person repairing or storing goods has a lien and right to keep possession until paid for such services (or sell to obtain payment)
g. Secured party vs buyer of collateral from debtor i. Sale in ordinary course of business
1. Buyer not subject to any creditors interest regardless of nknowledge of the security interest
ii.Sale not in ordinary cour- unperfected security interest 1. Security interest has no effect if buyer gives value
and buys in good faith (doesn’t know of security interest)
2. If buyer doesn’t satisfy these, they are subject to claims
iii.Sale not in ord cour – perfected security interested 1. Buyer of collateral is subject to tsecurity interest
iv.Sale not in orde cors- resale of consumer goods
1. Resale destroys the automaticall perfected PMSI of the creditor
2. If buyer had no knowledge, will not be subject to claims
3. Gives incentive to file financing statement regardless of automatic perfection bc filing by statement would continue the claims
17.Rights of the parties after default
a. Secured creditor can sue or proceed against the collateral b. Creditos posseion and disposition of collateral
i. Self-help reposseion is allowed if it can be done without causing a breach of the peace
ii.Otherwise can sue to obtain the collateral
iii.Secured creditor can sell, lease or dispose otherwise of 1. Can be public or private, any time/place/any terms
that is commercially resoable c. Creditors retention of collateral
i. Can keep it instead of selling it
ii.Notice of intention – must send debtor notice of this intent iii.Compulsory disposition of collateral – crediot must dispost
if debots makes a written objecting to retion within 21 days or if the collateral consists of consumer goods and the debtor has paid 60% or more tf the debt
1. Sale must be held within 90 days of repossession iv.If seller fails to dispose when required is liable to debtor
for conversion of collateral or for penalty imposed by the code
d. Debtors right of redemption – redeem prior to disposition by tendering the entire oblication plus legal cost and reasonable expenses
e. Dispotion of collateral – creditor must give required notice and act in commercially resonalble manner
i. Give notice of day, time location of sale, contact number for quesitonss of debtor nad other parties
ii.Must be sent to debtor and other creditors with interest 18.Posdispostion accounting
a. Proceeds first used to pay ezense of disposing of the collateral b. Next appied to debt oder to the secured creditor making the
dispotion
c. Remaing applied to other debts owed to secured creditors holding interests in the same collateral
d. Any surplus must be returned to the debtor
e. If proceeds are insufficient to pay the costs and debt of disposing creditor, the debtor is still liable for the deficit.
1. Definitions
a. Agency – relationship based on express or implied authority by which one person, the agent, is authorized to act under the control or and for antoehr, the principal, in neoiting and making contracts with third persons
i. Normally consensual but can be forced by law ii.Can also be contractual if consideration is present b. Acts of the agent obligate the principal to third persons
c. Employees and independent contractors – control and authorirty distinugised these from agents
i. Employee could be an agent but is not always one
ii.Independent contractor - Principal has no right to control the contractor in performance of his work
1. Can be treated as an employee in the eyes of the law if the contractor is controllerd by the principal
2. Same thing happens if separate identity of an independent contractor is concealed so the public believe its dealing with the principal
3. Principal would be liable as if contractor was agent/employee
2. Classifications of agents
a. Special agent – authorized to handle a specific act
b. General agent – authority to transact all affairs in connection with a particular type of business or trade or to transact all business at a certain place.
c. Universal agent – authorized to do all acts that can be delegated lawfully to a representative
3. Agency coupled with an interest (in authority or in the subject matter) a. An agent has an interest in the authority when consideration has
been given or paid for the right to exercise the authority b. An agent has an interest in the subject matter, when, for a
consideration, she is given an interest in the property with which she is dealing.
4. Creating the agency
a. Authorization by appointment
i. Express authorization – may be oral but some types are equired to be written such as when agency is created to acquire or dispose of any interest in land
ii.Written authorization of agency called power of attorney iii.Agent acting under power of attorney is referred to as an
attorney in fact b. Authorization by conduct
i. Coduct consistent with the existence of an agency relationship amy be sufficient to show authorization
ii.If third person has prior dealings with a principal, causing them to believe the agent has authority
iii.Called apparent authority when no actual authority but appeacence of authorityand that appearcne was created by the principal
iv.Test for apparent authority- principals outward
manifestations through words or conduct that lead a third person to reasonable beilve the agent has authority
1. Express restriction on authority not made known to the third party is no defense.
v.Apparent authority extends to reasonable acts
vi.The mere placing of property in the possession of another does not give that person either apparent or actual
authority to sell the property c. Agency by ratification
i. Principal can ignore or ratify unauthorized acts by agents or ppl pretending to be agents
ii.Intention to ratify
1. Intention may be expressed in words or in conduct indicating an intention to ratify
iii.Conditions for ratification
1. Agent must have purposted to act n behalf of or as an agent of the identified principal
2. Principacl must have been capable of authorizting the act both at the itme of the act and thetime of ratification
3. Principal must have full knowledge of all materal facts
4. dont have to show th principal had actual knowledge – can show the principal knows of other racts that would lead a prudent person to make inquires iv.effect of ratification
1. same effect as if act had been originally authorized 2. third person and principal bound by the agreement 3. also releases the unauthorized person from libaliity
that would be imposed by acting without authority 5. Providing the ageny relationship
a. Burned of proving existence rest on t he person who seeks to benefit by such proof
6. Scope of Agents authority
a. Express authority – orally or in writing
b. Incidiental authority- an agent has implied incidental authoriryy to perform any act resonablly necessary to exeute the express authority
c. Customary authority- an agent has implied customary atoirty to do any act that accoridn to the customs of the community
authoried to act (example – authority to issue receipts when authorized to sell)
d. Apparent authority – whne the principals words or conduct leads a third person to reasonable believe the person has the authority and the third person relys on that appearance
7. Effect of proper exercise of authority – binds the principal and third party, the agent is not a party to the contact.
8. Duty to acsetion extent of agents authority-
a. third person cannot rely on statements made by the agent concering extent of authority
b. third person is bound at their peril to findout the extent of the agents authority
c. agents acts adverse to principal
i. third person must notice any acts clearly adverse to the interest of the pricincipal
ii.third persons can protect themselves by inquiried of the principal wether the agent is in fact their agent and has necessary authority
9. limitations on aents authority
a. third persons cannot ignore knowledge of limitation if they have it
b. if the third party knows the agent’s authority is provided in a written document, they are expected to know the limiations contained in it
c. obvious limitations
i. expecially important with government contracts – third person must accurate ascertain the government agent is within the bounds of his or her authority
d. secret limitations
i. third person can take agent at face value (not bound by secret limiations of which person has no knowledge) 10.duties and libailites of agent during agency
a. loyalty – cannot obtain seret benefit from the agency. Agent cannot sell his own property to principal w/o disclosing it. If no disclosure, principal can approve transaction and sue for any secret profit.
i. Contrat is voidable by the principal if the agent who is supposed to sell property, buys it himself either directly or indirectly w/o full disclose
ii.Cannot act as agent for both parties in a transaction unless both agree to the dual capacity
iii.Cannot accept secret gifts or commissions – can be sued by the principal for those fits
b. Obedience and performance – obey all lawful instructions.
Required to perform services secified for time period and in way specified.
c. Reasonable care – act with the care that a reasonable person would excerise in the circumstances
i. Agent is liablile to its principals for all damges resulting from the agents failure to discharge its duties
ii.Agent must exercise special skill if possessed
d. Accounting- agent must account to principal for all property bellowing to the principal that comes into the agents possession. Must, within reaonble time, give notice o collections made and accurately account for all receipts/expenses
i. Agency agreement may state accounting intervals ii.Agent must keep principals property separate from
theirown
e. Information – keep principal informed of all facts relating to the agency that are relavent to protentinc ght principals interests 11.Dutines and liabilities of agent after termination of agentcy
a. Duties contunie only to extent necessary to perform prior obligations
i. Return all property
12.Dutiesand liabilities of principal to agent
a. Must perform the contract, compensate the agent for services, reimburse proper expense, and under certain circumastance sindeminift the agent for loss
b. Employment according to terms of contract
i. Principal obligated to permit the agent to act as an agent for the term of the contract (specified time)
ii.Exceptions for just cause or contractual proviisons allowing for early termination
iii.Must ive exclusive right if the contract says so c. Compensation
i. Msut pay agreed upon compensation
ii.If not specified amount, agent may recover customary compensation for such services or reasonable value iii.Repeating transactions / postagency transactions
1. Original agent does not receive comp for subsequent transactions unless the employment contract says so 13.Termination of agency
a. May be terminated by one or bother parties i. Duration normally stated in contract
ii.Either party can normally terminate at any time iii.Terminating party may be liabe for damages if the
termination is in violation of the agency ontact
iv.When a principal terminates an agents authority, not effective until the agent receives it
1. Must also provide notice to third persons b/c the agent will still have apparent authority
2. Agent may still have the power to bind the principal and third parties until this notice is given
b. Termination by operation of law
i. Anything that renders one of the parties incapable of performing
1. Death of either principal or agent (even if unknown to the other)
2. Insanity
3. Bankrupctpy of either principal or agent 4. Destruction of subject matter
5. When country of agent is at war with country fo principal
14.Disability of the principay under Uniform durable power of attorney act a. Power of attorney shalle not be affected by subdequent disability
or incapacity of the principal.
b. Principal can designate an attorney in fact in writing for the event of disability or incapacity.
c. Changes the general rule that insanity terminates relationship d. Durable powers of attorney grant only those powers specified in
the instuments and can be terminatied by revocation of a compentent principal or death of the principal.
15.Termination of agency oupled with an interest
a. HUGE exception to general rules of termination. Cannot be reovoked by the principal before expiration of the interest. Not terminatied by the death or insanity
16.Protection from termination of authirty
a. Exclusive agency conrac, secured transaction, escrow, standby letter of agreement, or guarantee agreement can protect agent from termaination of authority for no reason.
17.Effect of termination of authority
a. Not effective until agent receives notification
b. Must give notice to third persons b/c apparent authority c. Notice can be given or mailed to all persons who had prior
dealing siwht the agent.
d. Can also be given to general public by publisihing in local newspaper
e. If notice is actually received, power of agent is terminated without regard to whther giving of notice was proper
f. Conversely if proper notice is given, it does not mtter if the party notified actually reads it
Ch38 p 783-798 Third Persons in Agency
1. Action of Authorized Agent of disclosed principal a. Agent has no personal libality
b. Doesn’t matter if action was originally authorized or
unauthorized but later ratified by the principal, once effective ratification no more liability
2. Unauthorized action
a. If no authority, contract does not bind principal.
b. The person acting as the agent has an implied warranty to the third party that they are in fact authorized, if they lack this authority it is a breach of warranty
c. Agent can be liable for loss caused to third party
i. Good faith or misunderstanding scope of authority is no defense for the agent
d. Agent is not liable if the third party knew the agent didn’t have the authority
e. Agent with writeen authorization may avoid liability on the implied warranty of authority by showing the written
authorization to the third person so the third person can determine the scope of the agents authority
3. Disclosure of principal a. Disclosed principal
i. Agent is not a party to the contract made b. Partially disclosed principal
i. Agent makes known the existence o a principal but not the principals specific identity
ii. Agent is a party to the contract c. Undisclosed principal
i. Third person does not know the agent is acting for anone else – agent is a party to that contract
4. Assumption of liability
a. Agents may make themesleves liability
b. Agent may make a contract that is personally binding, for example if the principle is not disclosed.
c. Even if principal is dislosed, may be binding with the agent if the intention of the parties is the agent will assume some personal libality
5. Excecution of a contract
a. Simple contract that would appear to be agent-third party, can shave other evidence to show intent of contract btwn third party and pricnil
b. To avoid any quesiotn of interprestation, an agent should
execust an instrument by signing the principals name and either by or per then the agents name
c. parol evidence is admisale to establish the character of the agents actions
6. torts and crimes
a. agents are liable for harm caused to third persons by the agents fraudlent intetntional or negligent acts.
b. The fact they acted in good fatith under the drections of a
principal does not reclieve them of liability if their conduct would imporse liability on them when acting for themselves (example – crime)
7. agents contracts
a. simple contract with principal disclosed i. binding btwn principal and third party
ii. agent is not a party, not liablie for performance, and cannot sure for its breach
iii. liability not terminated on either side by giving money to the agent to give to the other party (must actually be delievered to them)
b. simple contract with principal partially disclosed
i. third person can recover from agent or the principal c. comple contract with principal undisclosed
i. if the third person learns of the existence of the undisclosed principal. They can sue the principal ii. can sue either agent, principal, or both
8. payment to agnet
a. when third person makes payment to an authorized agent, the payment is deemed made to the principal even if it never delivered to the principal.
b. Same effect for apparent and actual authotiryy
c. Third person does not get credit if paid to a person who is not the actual or apparent agent of the principal
9. Agents statements
a. Principal is bound by a statemtn made by an agent while transcting buniess within the scope of authority.
b. The statemetns of the agent must be made at the time of performng the act or shortly thereafter in order to bind the principal
10.Agents knowledge
a. Principal is bound by knowledge acquired by an agent while acting within the scope of actual or apparent authority
b. Can sometimes be extended to prior to creation of agency relationship
c. Relaiable information only rumors don’t cont
d. If subject matter is outside scope of agents authority, principal is not bound by it
e. Principal not bound if the agent is acting adversle yto the principals interst or the thrd party and agent act in collusion to cheat the principal
11.Vicarious liability for torts and crims a. Principal may be civilly liable
b. Rule of law imposing vicarious liability on an innonecnt employer for the wrong of an employee is respondeat superior
c. Nature of act
i. Negligent act
1. Negligent act committed within scope of employment ii. Inteniontal act
1. Employer is liable if the intential tort is committed by the mployee for the purpose of furthering the
employers’ interests iii. Fraud
1. Most states employers are liable iv. Government regulation
d. Course of employment
i. Act must be committed while the individual was acting within the scope of authority if an agent or in course of employment.
ii. If not within scope of employment, no vicarious liability e. Employee of the united states
i. US is liablie under cicumstances that a private employer would be
12.Negligent hiring and retention of employees
a. Normally used when implosing liability when act was outside of the scope of employment and the employer knew or should have know the employee was incompent, violent, dangerous or
criminal.
b. Need for due care in hiring
i. Must be shown the employer could have reasonable foreseen injury to the trhid party
ii. Background checks and similar are evidence of due care in hiring
c. Employees with criminal records
i. Not negligent in tseld, employer should investigate the nature of the convication in relationship to thejob to be performed
d. Negligent retention
i. If employer knew or should have known the employee would create an undue risk of harm
e. Negligent supervision and traingin
i. Principal is liable for negilglince in regard to supervision nd training
a. Principal is liable for crimes of an agent committed at the principals discretion.
b. Normally not liable if not authorized – even if while the agent was otherwise withing scoe of authority
i. Employer will be held liable for liquor sales or environmental stuff
14.Owners libality for acts of independent contractor
a. Owner is not liable for harm caused to third persons. b. Exceptions to owners immunity
i. When work undertaken is inherently dangerous
ii. When the owner controls the conduct of the contractor c. Undisclosed independent contractor
i. The apparent owner is liable if the existence of independent contractor is not disclosed or apparent 15.Enforncement of claim by third person – third person can sue agent,
principal or both until the judgement is collected in full 16.Soliciting and contracting agents
a. Salespeople are soliciting agents – authority is limited to soliciting offers and transmitting them to the principal. The
agent does not have the authorirt to bind the principal. The third person can withdraw anytime prior to acceptance.
b. Contracting agent- does have authorizty to make binding contracts
Ch41 p862-865
1. Individual Proprietorships
a. Own owner- can employ others. Common in retail stores, service busineses and agriculture.
b. Advantages
i. No organizational fees
ii.Sole owner controls all decisions and receives all profits iii.No double taxations
c. Disadvantages
i. Unlimited personal liability
ii.Investment in capitial limited by individuals resources iii.Business disintentgrates when owner dies
2. Parternships, LLPs, LLCs
a. Pooling capital resources and the telents of two or more indiividuals
b. Advantages
i. Pool resources withiout formal organizational structure c. Disadvantages
i. Unlimited personal liability for partnerships
iii.Llp protect partners from liability beyond their investment in the firm
3. Corporations
a. Corporate structure requiring shareholders, directors, officiers. b. Advantages
i. Shareholder risk is limited to capital invested
ii.Large numbers of investors can contribute to resources iii.Separate legal entitiy with perputal life
c. Disadvantages
i. Double taxation
ii.Expense of incorporation (registration, annual reports, etc) 4. Joint Ventures
a. Two or more people or entitires combine for a single buinsess undertakings
b. Similar to a partnership but differs in the goal of only one type of transaction (not continuing like partnership)
i. Similar laws govern both
c. Duration of joint venture – fixed duration proisiotn or terminable at the will of any participant, or when the project is completed or becomes impossible to complete
d. Liability to third persons – fault or neflience of one venture will be imputed to the other ventureeres
5. Unincorporated associations
a. Combination of tow or more erson for furtherance of a common purpose.
b. Authority over its members governed by ordinary contract law c. No legal existence apart from its members
d. Memebers are not liable for debts or liables of the association by mere fact they are members
i. Must be shown they authorieze fr ratified the act in question
ii.In that case, unlimited liability for the member 6. Cooperatives
a. Two or more people that cooperate for a specific function b. Incorporated cooperatives
i. Must repay excess over costs of operation to memebers c. Antitrust exemption
i. Basically in violation of antitrust laws but given exemption as long as the cooperative do not conspire with outsiders to fix prices
7. Franchises
a. Method of doing business not a form of organization b. Relies on contract law
c. Franchosr grants the franchise to the franchisee. Ch42 p880-897 Partnerships
1. Nature and Creation
a. Can be created w/o formality of written agreement
b. Partnership agreements cover most issues but the Revied Unifrom Partnership Act covers anything not specified in your agreement
2. Defninton of partnership
a. Association of two or more persons to carr on as co-owners a business for profit.
b. A partner is an agent of the partnship (but not an employee of the partnership)
3. Characteristics
a. Voluntary, consensual relationship
b. Involves partners contributions of capital, services or a combination
c. Parterres are coowners to transact business for profit
i. If profit is not the object, the group will commonly be an unincorporated association
d. It is not a separate entitiy
4. Rights of the partners – determine by the partnship agreement or the applicable UPA or RUPA provisinos
5. Partnership agreement
a. Typically written due to complexity though not required b. Formal document is prepard to evidence the contract of the
patires is temer a parnetship agreement, articles of pernership or rticles of corpartnerhisp.
6. Determining existence of a partnership
a. Law is concerned with the substance of a relationship rather than the name
b. It does not arise if the parties do not agree to the elements of a partnership even if they call it one.
c. Shown to exist when it is establishied that the parties have agreed to the formation of a business organization that has the charcetistics of a partnership
d. Burden of proiving existence is on the person who claims one exists
i. Control -Absecense or presence of contntrol is significant ii.sharing profits/losses – strong evidence of a partnership iii.sharing profits – an agreement that does not provide for
sharing losses but does for sharing profits is evidence of partnership.
1. If partners share pfotis, assumed they will share losses
2. Sharing profits when they are received in payment of debt, of wages, an annuity to a deceased partners spouse, of interst or for goodwill will not be
iv.Gross returns
1. Sharing of gross returns is sligh evidence of a partnership
v.Contribution of skill or labor
1. Not all patners must contribute capital, some may contribute only skill or labor
vi.Fixed payment
1. When a person who performs continuing services for another receives a fixed payment that does not
depend on existnese of profit or losses, that person is not a partner
7. Pateners as to third persons
a. Persons who are not partners may be held liable to third persons as though they were partners if the conduct themselves in a manner that others reasonable believe they are partners and act on that belief to cause injury
i. Called nominal partner, partner by estoppel or ostensible partner
b. An apparent partnership or partnership by estoppel is called a purposted partnership, a third party can hold the person liable as if they were an actal partner with authority
c. Partnership can limit potential libality with a publiciy record record of partnership authority
8. Partnership property
a. All proprety contributed by the partners or acquired for the firm or with its funds
b. Real estate owned by one of the partners can become
partnership property if the parties agree to it (even if its in the name of the one partner)
c. A partner must condition transfer to the partnership if they wish to retain interest in the property (or set forth in th partnership agreement)
i. Otherwise it will become partnership property 9. Tenancy in partnership
a. Partners hold title to firm propery by tenancy in partnerhip i. Each partner has an equal right to use firm property for
partnership purpose in the absencse of a contrary agreement
ii.Partner posesse no dividible interest in any specific item of partentership propery
iii.Credit of a partner cannot proceed against any spefici items of partnership property. Can only proceed against the partners interest in the partnership. Done by applying to a court for a charging order
1. Charging order- profits that would be paid to the partner are paid to his creditor or the court may direct a sale of the partnerhship interest
iv.Upon death of a partner, the partnership propert vest in the surivign parnters for partnership purpose and is not subject to the rights of the survingin spouse of the decesased partner
10.Assign of a partnets interest
a. A partners interest in the partnership may be voluntarily assigned by the partner.
b. Assigne does notbecome a partner without the consent of the oter patterns, without this consent, the assignee can only receive the assignors share of the profits and assinonrs interest upon dissolution of the firm.
i. No right to mangament or to inspect the books of the firm 11.Authority of majority partners
a. The decision of the majority prevails in matters involving how the ordinary functions of the business will be conducted.
b. Majority action is not binding if it contrives the partnership agreement
i. Unanimous action is required for this
c. If partnership is evenly divided, no one has authority to act d. One partner may petition the court for a dissolution of the firm 12.Express authority of individual partners
a. An individual partner may have express authorirty for certain acts if provided for in the partnership agreement or if majority votes for it.
b. Acts of a partner in excess of authroriry does not bind the parternship
13.Customary authority of individual partners
a. A partner may make any contract necessary to transact the firms business
b. Can buy or sell or borrow in the regular scope of business i. Can brrow in the firms name or pledge collateral 14.Limations on authority
a. Partners may agree to limit the powers of each partner
b. If the partner violates this agreement, the partnership is still bound to the third party but can proceed against the specific partner.
i. If the third party knew of the limitation, the partnership is not bound
c. Can file a statement of partnership authority publicly
d. Xa third person cannot assume the partner has ll the autirty th partner purpost to hve.
i. Third party bound by reasonable assumptions 15.Prohibited transactions
a. Cessation of business – partner cannot bind the firm by a contract that would make it impossible to do ordinary business b. Suretyship – a partner has no implied authority to bind the firm
by contracts of surety, guarantee or indemnity for purposes other than firm business
c. Arbitration- partner cannot agree to arbitration unless authorized by other partners
d. Confession of judgement- a partner cannot confess on behalf of the firm as all partners have an opportunity to defend in court e. Assignment for creditors – partner cannot make a feneral
assignment of firm property for the benfit of creditors unless authorized by other partners
f. Personal obligations – partner cannot dischange personal
obliation or claims of the firm by interchanging them in any way. 16.Duties of partners
a. Loyalty and good faith
i. No personal benefit or exploitation ii.Cannot promote competing business
iii.A breach of fiduciary duty requires the complete forfeiture of all compseatio n during the period of the break
b. Obedience
i. Each partner is obligated to perform all duites and to obey all restictions imposed by the partnership agreement or by the vote of the required number of partners
c. Other duties
i. Must refain from grossly negligent or intentional misconduct in trasnaing firm business.
17.Rights of partners as owners a. Management
b. Inspection of books
c. Share of profits – equal share unless stated otherwise
d. Compensation – in absence of a contrary agreement, partner is not entitled to compensation for service performed for the partnership.
e. Repayment of loans – partner is entitle to or return of any money advance to or for the firm. Must be separate and distinct from original or additional contributions to the capital of the firm f. Payment of intest- contributions to capital do not draw interst.
Loans will bear interst but not ontibuties to capital
i. If retired partner leaves stake in the ongioing partnership, he is entitled to interest
g. Contribution and indemnity
i. A partner who pays more than a mproporionate share of the debts is entitle to contribution from other employees
ii.The partnership must indemnify every partner for paryments made and personal liablites reasonable incureed in tth ordinary and proper conduct of busnesss. iii.No right do indmeitn yor reimbursement if the partner
acted in bad faith, negligialy cause the necessetiy for payment or previously agreed tot assume the expense alone
h. Distribution of capital
i. After the payment of all creiedots is made, every partner is entitles to a share of leftover firm property (equal unless stated otherwise)
18.Liabilities of partners and partnership
a. Nature and extent of partners liability i. Jointly liable for firm contracts
ii.Jointly and severally liablies for torts commited in the scope of partnership business
1. Remember right of contribution from other partners iii.RUPA requires that creditors and tort victims satisfy their
claims against the partnership before pursuing the personal assest of a partner
b. Liability of new partners
i. Limited libality for all obtliations of the partnership arising before they joined
1. Only partnership property but not individual property of the new owned
c. Effect of dissolution on partners liability
i. Partners remain liablile unless expressly relaead by the creditors
ii.Individual property of a dead partner is liable for obligation s of the partnership that were incurred while he was alive
1. Individual creditors have priority over partnership creditors
19.Enforcement and satisfaction of creditors claims
a. Partnerships assets exhausted before partnership creditors can reach a partners individual assets
b. Personal creditors must first purseue that partners personal assets
i. Then a charging order against partners interst in the partnship
20.Effect of dissolution
a. Dissolution does not necessarily meant hat the business has ended, it may be continued by the reminin partners
b. From the moment of dissolution, the authority of the partners is reduced to only the winding down transactions.
21.Dissolution by act of the parties a. Agreement
i. By terms of original agreement of the parties, expiration of stated duration, or expiration of the object of the
partnership.
ii.May also be dissolved by subsequent agreement b. Explusion
i. A partnership is dissolved by expulsion of any pernert from the business, whether or not authorized by the partnership agreement
c. Alienation of inteets
i. Neither a voluntary sale of a partnets internt nor an invovulatary sale for the benefor of creditors results in a dissolution
d. Withdrawal
i. Partner can withrdraw at any time
ii.If violates partnership agreement, liablilty arises 22.Dissolution by operation of law
a. Death – immeadiately upon the death of any partner. The
exuctor of a deceared partner may carry on the buniess with the remaining partners but it is legally a new firm
b. Bankruptcy of one or more partners causes a dissolution, but insolvency does not
c. Illegality – if prupose is illegeal, it is dissolved 23.Dissolution by decree of court
a. Insanity – judge declars a partner insane b. Incapacity
c. Misconduct – a partner pleaseds guilt of conduct that substinatilly prejudices the condituinace of the business
d. Impractivacablity – is a partner consistnely acts so bad to destroy confidence and cooperation between partners
e. Lack of success – parntship cannot cinutne in business except at a loss
f. Equitable circumstances – if one partner was inducted by fraud to enter into the partnership
24.Dissolution under the UPRA – under rupa’s entity concept a partern can leave the firm and dnot drsipt the partnerships legal existence. rRue uses dissociation for the depature of a partner and reserves the term dissolution for theose instances when a partners depature results in the winding up and termination of the business.
a. Notice of dissociation should be provided to creditors, etc so that no apparent authority exists
25.Notice of dissolution
a. A partner must provide notice ot other partners that clearly shows an intent to withdraw from or dissolve the firm.
b. Notice to third partirs – must be given to avoid apparent authoriry.
c. If dissolution was caused by operation of law, notice ot third person s is not required.
26.Winding up partnership affairs – conduct ordinary business while valuing the company.
a. If forced by a court, a receive may condust the winidng down 27.Distribution of assets – credits have firm claim on the assets of the
partnerships
a. Firm credits have claims superior to indivudial creditors b. Then in order
i. Refund to partners for laons made to firm ii.Capital contriburiton are returned
iii.The profits are divided
c. A partner who contributes only services is not considered to have made a capital contribution bsent a contrary agreement.
d. Can have provisions in partnship agreements that upon death the interest will passs to partners surviign spouse.
e. Technical dissolution, winding up and termination of original parntship but ofter surivign parterns continue.
Ch43 p904-915LPS LLC LLPs 1. Formation of LPs
a. Members of a Lmited partnership
i. Certain memebers contribute capital but have limited liability for the firms debts (can only lose their investment) b. Certificate of LP
i. Names of general partners required but not limited partners
ii.If no LP certificate is filed, all parents have the status and liability of general partners
iii.Small defects don’t ruin the filing if in goodfaith c. LP Agreement
i. Normally drafted by general partners
1. Courts strictly interpret in favor of the limited partners
2. Characteristics of LPs
a. Capital contributions – limited partners contribute either cash or proper but not services under ULPA, may contribute services under RULPA
b. Frm name- limited partners name cannot appear in the firm name and the words limited paernsheip must appear without abbreviation in fthe firm name
i. General partners manage the business and are personally liable for the debts
ii.Limited partners have right to a share of the profits and return of caital upon dissolution and have limited lialbiltiy.
1. Lose the limited liability if they participate in control 2. Safe habor activities allowed w/o loss of protection
a. Contractor for, agent of employee of the limited partnership or general partner
b. Consulting with and advising a gernal partner regarding the partnship business
c. Acting as a surety for the limted partnership d. Voiting on partnership matters such as
siddolving and winign up the limited
partnership or reomovign of a gernal partner. d. Right to sure
i. Limited partner can sue on behalf of the LP if the
partnership refuses to persue claims its entitled to. The partnshp is the defendant in the suit.
e. Dissolution – governed by same principles applicable to general parnetships
3. Characteristics of Limited Liabillity Companies
a. Preferential tax treatement and limited liability b. Formation
i. Formal filing of articles of organization with the secretary of state.
ii.Must use LLC or limited liability company in the namec iii.Can conduct buinsess in its own names
c. Capital contributions
i. Owners are know as memebers
ii.Must comply with the operating agreement d. Management
i. Operating agreement need not be in writing.
ii.All amendments must be unanimous unless otherwise agreed to by the memebers
iii.Oral amendments may modify written temrs unless otherwise stated
iv.Often delegate management authority to manages who may not even be members of the LLC
v.Members are not entitled to compensation performed on behalf of the LLC unless specifically stated (profits/losses are the compenstation)
vi.Majority shareholders control day to day decisions vii.Nomanager members have no rights in management
except for amending the operating agreement or consenting to merge with another entity.
i. Per the operating agreement
ii.First applied to return contributions then pro rata distribution of profits
iii.Any distrubition made when the company is insolvent is unlawful
f. LLC property – independent entity spate and distict from its memebers. The LLC owns and holds the property in its own name.
g. Assignment – an interest in an LLC is personal property and is generally assignable. Cannot transfer management rights
without consent of other members. Creditors must use charging order.
h. Dissolution- dissolve by the consent of the members or upon death, retirement ,r esingation, epxuslion or bankfruptcy of a member. Business is often continued by remaining members
i. Courts may decree discolution as well
i. Tax classification – used to use four factor test to detmine partnership vs corporation, allowing no more than two
characteriscts to exist to qualify for taxation as a partnership i. Unlimited life
ii.Centralized managed iii.Limited liabliilty
iv.Free transderabilty of interest
v.NOW JUST CHECK THE BOX ON THE IRS FORM
j. Disregarding the LLC entity – court may disrecare and hold owners personally liablie when exceptional circumstances exist 4. LLCs and Other entities
a. S corps – s corp is limited to 75 shareholders who must be us citizens. LLC has no restriction on type or number of owners (partnerships, corps and foreign investors can invest in LLC but not S corp)
b. LPs must have a general partener who is subject to unlimited liability. Limited partners lose limited liability if they participate in control. Under LLC, mmebers can activiale participate in the control and still maintain limited liability.
c. Usage – LLC will likely replace general and limited partnerships as well as close corps and s corps.
5. LLPs
a. Eliminate vicarious personal liability for partners that could arise from other partners misconduct
b. Liability shield only applies to third parties – does not sield againset breaches of the patterns obligations to each other and their own negligence as well as the acts of those whom they directly supervise and control
i. Registered with secretary of the state and contain llp or limited liability partnership in the name
ii.
