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The Legal Environment of Business 9th ed. Notes.

by: Tiffany Notetaker

The Legal Environment of Business 9th ed. Notes. MGMT 246 - 03

Marketplace > California State University - Fullerton > Business, management > MGMT 246 - 03 > The Legal Environment of Business 9th ed Notes
Tiffany Notetaker
Cal State Fullerton
GPA 3.62
Business and Its Legal Environment
Charles Smith

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Chapter 9 - 16 Textbook Notes.
Business and Its Legal Environment
Charles Smith
business management
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This 49 page Bundle was uploaded by Tiffany Notetaker on Monday September 28, 2015. The Bundle belongs to MGMT 246 - 03 at California State University - Fullerton taught by Charles Smith in Summer 2015. Since its upload, it has received 15 views. For similar materials see Business and Its Legal Environment in Business, management at California State University - Fullerton.

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Date Created: 09/28/15
Chapter 9 Formation of Traditional and E Contracts 1 An Overview of Contract Law A Common law governs all contracts except when modified or replaced by statutory law such as the Uniform Commercial Code UCC or administrative agency regulations Contracts for the sale and lease of goods are governed by the UCC A contract is an agreement that can be enforced in court It is formed by two parties who agree to perform or to refrain from performing some act now or in the future Contract disputes arise when there is a promise of future performance Intent is determined by the objective theory of contracts a party s intention to enter into a legally binding agreement is judged by outward objective facts rather than the belief of a party Four elements are required for a valid contract to exist agreement consideration contractual capacity and legality Regardless of whether the contract meets all requirements previously stated there are legitimate defenses to the enforceability of a contract such as involuntary consent and the form a contract takes Types of Contracts A B C Contracts can be classified according to how and when they are formed Contracts involve at least two parties The offeror is the party making the offer and the offeree is the party to whom the offer is being made a In a bilateral contract the offeree can accept simply by promising to perform The contract comes into existence when promises are exchanged b In a unilateral contract the offeree can accept the offer only by completing the contract performance It is formed at the moment the contract is performed but there are no legal consequences 0 Problems arise in unilateral contracts when the offeror attempts to revoke the offer after the offeree has begun performance but before it has been completed Today once performance has been substantially undertaken the offeror cannot revoke the offer Formal contracts are contracts that require a special form or method of creation to be enforceable such as negotiable instruments checks drafts promissory notes etc Informal contracts simple contracts include all other contracts No special form is required contracts are usually based on their substance rather than form An expressed contract is one in which the terms of the agreement are fully and explicitly stated in words oral or written An implied contract is one that is implied from the conduct of the parties the conduct of the parties creates and defines the terms of the contract a An implied contract is formed when the plaintiff furnished some service or property the plaintiff expected to be paid for that service or property and the defendant know or should have known that payment Chapter 9 Formation of Traditional and E Contracts was expected and the defendant had a chance to reject the services or property and did not b A contract can contain some expressed and some implied terms E An executed contract is one that has been fully performed on both sides An executor contract is one that has not been fully performed by the parties F A valid contract has the elements necessary to entitle at least one of the parties to enforce it in court a A voidable contract is a valid contract but can be avoided at the option of one or both parties b An unenforceable contract is one that cannot be legally enforced because of certain legal defenses against it c A void contract is no contract at all None of the parties have legal obligations It can be void because of one of the parties was determined by a court to be mentally incompetent 3 Agreement A An agreement is when the parties agree on the terms of the contract and manifest to each other their mutual assent to the same bargain Agreement is evidenced by an offer and an acceptance B An offer is a promise or commitment to do or refrain from doing some specified action in the future Three elements are necessary for an offer to be effective under common law the offeror must have a serious intention to become bound by the offer the terms of the offer must be reasonable certain so that the parties and the court can ascertain the terms of the contract and the offer must be communicated to the offeree a A serious intent is required for an effective offer It is determined by what a reasonable person in the offeree s position would conclude that the offeror s words and actions meant b There are types of statements that are not offers i An expression of opinion does not indicate an intention to enter into a binding agreement ii A statement of an intention to do something in the future is not an offer iii A request or invitation to negotiate is not an offer it only expresses a willingness to discuss the possibility of entering into a contract iv Advertisements are treated not as offers to contract but as invitations to negotiate It invites buyer to offer to buy at that price v A preliminary agreement constitutes a binding contract if the parties have agreed on all essential terms and no disputed issues remain to be resolved If parties agree on certain major terms but leave other terms open for further negotiation it is not binding Chapter 9 Formation of Traditional and E Contracts c An offer must have reasonable definite terms so that a court can determine if a breach has occurred and give an appropriate remedy Generally a contract must include identification of the parties identification of object or subject matter of the contract consideration to be paid and time of payment delivery or performance 1 The offer must be communicated to the offeree C A contract can be terminated either by action of the parties or by operation of law a An offer can be terminated by action of parties by revocation rejection or counteroffer i Revocation is the offeror s act of withdrawing an offer This is valid as long as the revocation is communicated to the offeree before the offeree accepts ii A form of irrevocable offer is an option contract when an offeror promises to hold an offer open for a specified period of time in return for a payment given by the offeree It takes away the offeror s power to revoke the offer for the period of time specified in the option iii A rejection of an offer is only valid when it is actually received by the offeror or the offeror s agent iv A counteroffer is a rejection of the original offer and simultaneous making of a new offer The mirror image rule requires the offeree s acceptance to match the offeror s offer exactly b A contract can be terminated by operation of law through occurrence of lapse of time destruction of the specific subject matter of the offer death or incompetence of the offeror or offeree or supervening illegality of the proposed contract i An offer terminates automatically by law when the period of time specified in the offer has passed If it does not state a specific time it is terminated within a reasonable period of time ii A statute or court decision that makes an offer illegal automatically terminates the offer D Acceptance is a voluntary act by the offeree that shows assent to the term of an offer The acceptance must be unequivocal and communicated to the offeror a An acceptance must be unequivocal even though the offeree expresses dissatisfaction with the contract b Silence normally cannot constitute acceptance However silence does constitute acceptance when an offeree takes the benefit of offered services even though they had an opportunity to reject them and knew that they were offered with the expectation of compensation and the offeree has had prior dealings with the offeror Chapter 9 Formation of Traditional and E Contracts c In a bilateral contract acceptance is in the form of a promise so communication of acceptance is necessary 1 In bilateral contracts acceptance must be timely i The mailbox rule is that if the authorized mode of communication is the mail then an acceptance becomes valid when it is dispatched not when it is received by the offeror ii A means of communicating acceptance can be expressly authorized by the offeror or impliedly authorization by the facts and circumstances of the situation iii If the offeror authorizes a particular method of acceptance but the offeree accepts by a different means the acceptance may still be effective if the substituted method services the same purpose as the authorized means 4 EContracts A Econtracts must meet the same basic requirements as paper contracts Disputes tend to center on contract terms and whether the parties voluntarily agree to those terms B Sellers doing business on the Internet can protect themselves against contract disputes and legal liability by creating offers that clearly spell out the terms that will govern their transactions if the offers are accepted a The offeror controls the offer and thus the resulting contract An online should offer at minimum acceptance of terms payment returns policy disclaimer limitation on remedies privacy policy and dispute resolution b Online offers usually include provisions relating to dispute settlement i Many online contracts contain a forumselection clause indicating the forum in which contract disputes will be resolved It helps to avert future jurisdictional problems and ensure that the seller will not be required to appear in court in a distant state ii Some online contracts include a choiceoflaw clause specifying that any contract dispute will be settled according to the law of a particular jurisdiction C The Restatement Second of Contracts is a compilation of common law contract principles that states that parties may agree to a contract by written or spoken words or by other action or by failure to act a A clickon agreement is the act of clicking on a box indicating I accept or I agree to accept an online offer The law generally does not require that parties have read all of the terms in a contract for it to be effective b In a shrinkwrap agreement the terms are expressed inside the box in which the goods are packaged The party who opens the box is usually told that they agree to terms by keeping whatever is in the box Chapter 9 Formation of Traditional and E Contracts i Courts have reasoned that by including the terms with the product the seller proposed a contract A buyer s failure to object to terms contained within a shrinkwrapped software package may constitute an acceptance of the terms by conduct ii Sometimes courts have refused to enforce certain terms included in shrinkwrap agreements because the buyer did not expressly consent to them c Browsewrap terms occur in transactions conducted over the Internet These are usually unenforceable because they do not satisfy the agreement requirement of contract formation D An esignature is defined as an electronic sound symbol or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record E The Electronic Signatures in Global and National Commerce Act ESIGN Act provides that no contract record or signature may be denied legal effect solely because it is in electronic form F The Uniform Electronic Transactions Act UETA declares that a signature may not be denied the legal effect or enforceability solely because it is in electronic form Its primary purpose is to remove barriers to ecommerce by giving the same legal effect to electronic records and signatures as paper documents and signatures A record is information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable visual form a The UETA does not create new rules for electronic contracts it establishes that records signatures and contracts may not be denied enforceability solely due to their electronic form It covers only electronic signatures relating to a transaction between two or more people in a business commercial or governmental context b If the state has enacted the UETA without modification state law will govern c Under the UETA if an electronic record or signature is the act of particular person the record or signature may be attributed to that person 5 Consideration A Under common law a primary basis for the enforcement of promises is consideration Consideration usually is defined as the value given in return for a promise or in return for a performance Consideration is broken down into two parts something of legally sufficient value must be given in exchange for the promise and there must be a bargainedfor exchange B To be legally sufficient consideration must be something of value in the eyes of the law which may consist of a promise to do something that one has no prior legal duty to do performance of an action that is otherwise not obligated to undertake refraining from an action that one has a legal right to undertake forbearance Chapter 9 Formation of Traditional and E Contracts C D The second element of consideration is that is must provide the basis for the bargain struck between contracting parties item of value must be given or promised in return for promise performance or promise of performance Sometimes one of the parties or both to an agreement may think that consideration has been exchanged when it has not a A promise to do what one already has a legal duty to do does not constitute legally sufficient consideration The preexisting legal duty may be imposed by law or arise out of a previous contract A party that is already bound to perform a certain duty cannot have consideration for a second contract i If extraordinary difficulties arise that were totally unforeseen at the time of the contract was formed during performance of said contract a court may allow an exception ii Rescission is the unmaking of a contract so as to return the parties to the positions they occupied before the contract was made b Past consideration is the idea that you can bargain for something to take place now or in the future but not for something that has already taken place A covenant not to compete is an agreement such that the employee agrees not to compete with the employer for a certain period of time after the employment relationship ends 6 Contractual Capacity A D For a contract to be deemed valid the parties to the contract must have contractual capacity the legal ability to enter into a contractual relationship When a person is young or mentally incompetent capacity may be lacking or questionable The age when a person is no longer a minor is 18 years of age A minor can enter into any contract that an adult can except contracts prohibited by law for minors purchasing tobacco or alcohol It is voidable at the option of the minor Legal avoidance of a contractual obligation is disaffirmance Intoxication is a condition in which a person s normal capacity to act or think is inhibited by alcohol or some other drug If the person was sufficiently intoxicated to lack mental capacity the agreement may be voidable If the person understood the legal consequences of the agreement despite intoxication the contract is enforceable Contracts made by mentally incompetent persons can be void voidable or valid 7 Legality A Legality is the fourth requirement for a valid contract to exist For a contract B to be valid and enforceable it must be formed for a legal purpose Statutes often set forth rules specifying which terms and clauses may be included in contracts and which are prohibited a Any contract to commit a crime is in violation of a statute Chapter 9 Formation of Traditional and E Contracts b A lender who makes a loan at an interest rate above the lawful maximum commits usury Many states exempt corporate loans from usury laws c Gambling is the creation of risk for the purpose of assuming it States traditional deem gambling contracts illegal and void 1 All states require members of certain professions to have licenses C Contracts contrary to public policy are those that involve private parties but are not enforceable because of the negative impact they would have on society a Contracts in restraint of trade anticompetitive agreements usually adversely affect the public policy that favors competition in the economy i A covenant not to compete or a restrictive covenant may be created when a seller of a store agrees not to open a new store in a certain geographic area surrounding the old business ii Covenants not to compete included in employment contracts are legal as long as the specified period of time is not excessive in duration and geographic restriction is reasonable iii Laws governing enforceability of covenants not to compete vary significantly from state to state causing problems Courts will sometimes reform covenants not to compete if it is found unreasonable in time or geographic area the court may convert the terms into reasonable ones and enforce them b Courts normally do not deal with fairness or equity of a contract but in some cases bargains are so oppressive that the courts relieve innocent parties of part or all of their duties These bargains are called unconscionable because they are so grossly unfair c Exculpatory clauses release a party from liability in the event of a monetary or physical injury no matter who is at fault 8 Form the Writing Requirement and Electronic Records A A contract that is otherwise valid may still be unenforceable if it is not in the proper form The Statute of Frauds stipulates what types of contracts must be in writing It denies enforceability to certain contracts that do not comply with its writing requirements 9 Third Party Rights A The privity of contract is the relationship that exists between the promisor and the promise of a contract A third party normally does not have rights under that contract but there are exceptions assignment rights and delegation duty B When rights under a contract are assigned unconditionally the rights of the assignor are extinguished and the assignee has a right to demand performance from the other original party to the contract Some exceptions are the assignment is prohibited by statute the contract is personal the assignment Chapter 9 Formation of Traditional and E Contracts significantly changes the risk or duties of the obligor or the contract prohibits assignment C Delegation of duties does not relieve the delegator of the obligation to perform in the event that the delegatee fails to do so Any duty can be delegated except under the following circumstances When special trust has been placed in the obligor When performance depends on the personal skill or talent of the obligor When performance by a third party Will vary materially from that expected by the oblige under the contract or When the contract expressly prohibits delegation D When the original parties to the contract agree that the contract performance should be rendered to or directly benefit a third person that third person becomes an intended third party beneficiary An incidental beneficiary is a third person Who receives a benefit from a contract even though that person s benefit is not the reason the contract was made Chapter 10 Contract Performance Breach and Remedies 1 Voluntary Consent A An otherwise valid contract may still be unenforceable if the parties have not genuinely agreed to its terms Voluntary consent may be lacking because of a mistake misrepresentation undue in uence or duress B Only a mistake of fact makes a contract voidable The mistake must involve some material fact a fact that a reasonable person would consider important when determining their course of action A unilateral mistake is made by only one of the parties A bilateral mutual mistake is made by both of the contracting parties a A unilateral mistake generally does not give the mistaken party any right to relief from the contract The contract is normally enforceable However the contract may be enforceable if the other party to the contract knows or should have known that a mistake of fact was made or the error was due to a substantial mathematical mistake in addition subtraction division or multiplication and was made inadvertently and without extreme negligence b When a bilateral mistake is made either party can rescind the contract 0 If a mistake concerns the future market value or quality of the object of the contract the mistake is one of value and the contract is therefore usually enforceable C When an innocent party is fraudulently induced to enter into a contract the contract normally can be avoided because that party has not voluntarily consented to its terms Typically fraudulent misrepresentation consists of a misrepresentation of a material fact an intent to deceive an innocent must that must justifiably rely on the misrepresentation and to collect damages a party must have been harmed as a result of the misrepresentation a Misrepresentation can occur by words or actions It also occurs when a party takes specific action to conceal a fact that is material to the contract b To recover damages caused by fraud proof of harm is required D Undue in uence arises from relationships in which one party can greatly in uence another party thus overcoming that party s free will The essential feature of undue in uence is that the party being taken advantage of does not exercise free will in entering into a contract E Agreement to the terms of a contract is not voluntary if one of the parties is forced into the agreement The use of threats to force a party to enter into a contract is duress 2 Performance and Discharge A The most common way to discharge terminate one s contractual duties is by the performance of those duties B A condition is a qualification in a contract based on a possible future event A condition precedent is a condition that must be fulfilled before a party s performance can be required Chapter 10 Contract Performance Breach and Remedies C Contracts come to an end when both parties fulfill their respective duties by performing the acts they have promised Performance can also be accomplished be tender an unconditional offer to perform by a person who is ready willing and able to do so a When a party performs exactly as agreed there is no question as to whether the contract has been performed When the performance is perfect it is complete b A party who in good faith performs substantially of all the terms of a contract can enforce the contract against the other party under the doctrine of substantial performance The party must have performed in good faith the performance must not vary greatly from the performance promised in the contract and the performance must create substantially the same benefits as those promised in the contract i If performance is substantial the other party s duty to perform remains absolute If performance is not substantial there is a material breach and the nonbreaching party is excused from further performance ii Substantial performance is not perfect and the other party is therefore entitled to damages to compensate for failure to comply with the contract 0 Contracts often state that completed work must personally satisfy one of the parties or a third person When the subject matter of the contract is personal the obligation is conditional and performance must actually satisfy the party specified in the contract 1 A breach of contract is the nonperformance of a contractual duty The breach is material when performance is not at least substantial When there is a material breach the nonbreaching party is excused from the performance of the contractual duties and can sue the breaching party for damages i If the breach is minor not material the nonbreaching party s duty to perform is not entirely excused ii Any breach entitles the nonbreaching party to sue for damages but only a material breach discharges the non breaching party from the contract e Anticipatory repudiation of a contract is when one of the parties refuses to carry out their contractual obligations before either party to a contract has a duty to perform This is a material breach because the nonbreaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract and should have the opportunity to seek a similar contract elsewhere Chapter 10 Contract Performance Breach and Remedies f If no time for performance is stated in the contract a reasonable time is implied If a specific time is stated the parties must usually perform by that time D Any contract can be discharged by agreement of the parties a Mutual rescission is when the parties must make another agreement that also satisfies the legal requirements for a contract If the parties agree to rescind the original contract their promises not to perform the acts stipulated in the original contract will be legal consideration for the second contract A contractual obligation may also be discharged through novation when both of the parties to a contract agree to substitute a third party for one of the original parties A novation requires a previous valid obligation and agreement by all parties to a new contract the extinguishing of the old obligation a new contract that is valid A compromise settlement agreement that arises out of a genuine dispute over the obligations under an existing contract will be recognized at law In an accord and satisfaction the parties agree to accept performance that is different from the performance originally promised An accord is a contract to perform some act to satisfy an existing contractual duty that is not yet discharged A satisfaction is the performance of the accord agreement E Contractual duties may be discharged by operation of law under certain circumstances including material alteration of the contract the running of the statute of limitations bankruptcy and the impossibility or impracticability of performance a b The law allows an innocent party to be discharged when the other party has materially altered a written contract without consent Statutes of limitations restrict the period during which a party can sue on a particular cause of action After the applicable limitations period has passed a suit can no longer be brought Discharge in bankruptcy is when a proceeding in bankruptcy attempts to allocate the debtor s assets to the creditors in a fair and equitable fashion This prevents the creditors from enforcing most of the debtor s contracts Impossibility of performance applies only when the parties could not have reasonably foreseen the event that rendered performance impossible at the time the contract was formed i Three basic types of situations quality as grounds for the discharge of contractual obligations based on impossibility of performance one of the parties to a personal contract dies or become incapacitated prior to performance specific subject matter of the contract is destroyed or when a change in law renders performance illegal Chapter 10 Contract Performance Breach and Remedies 6 ii An occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases Once the temporary event ends the parties ordinarily must perform the contract as originally planned To invoke the doctrine of commercial impracticability successfully the anticipated performance must become significantly difficult or costly The added burden of performing must not only be extreme but also must not have been known by the parties when the contract was made The doctrine of frustration of purpose is relevant when a contract will be discharged if supervening circumstances make it impossible to attain the purpose both parties had in mind when they made the contract It usually involves an event that decreases the value of what a party receives under the contract 3 Damages for Breach of Contract A A breach of contract entitles the nonbreaching party to sue for monetary damages B There are four broad categories of damages a Compensatory damages are damages that compensate the non breaching party for the loss of the bargain They replace what was lost because of the wrong or damage i The standard measure of the compensatory damages is the difference between the value of the breaching party s promised performance under the contract and the value of their actual performance Incidental damages are expenses that are caused directly by a breach of contract ii In a contract for the sale of goods the usual measure of compensatory damages is an amount equal to the difference between the contract price and the market price iii In the sale of real estate the buyer is awarded the parcel of property for which they bargained specific performance but when the buyer is in breach the measure of damages is the difference between the contract price and the market price iv The measure of damages in a building or construction contract varies depending on which party breaches and when the breach occurs breach by owner contractor and both owner and contractor b Consequential damages special damages are foreseeable damages that result from a party s breach of contract They are caused by special circumstances beyond the contract itself Punitive damages generally are not awarded in lawsuits for breach of contract They are meant to punish a wrongdoer and set an example Chapter 10 Contract Performance Breach and Remedies When a person s actions cause both a breach of contract and tort punitive damages are available 1 Nominal damages are awarded when no actual damage or financial loss results from a breach of contract and only a technical injury is involved They are often small but establish that the defendant acted wrongfully C When a breach of contract occurs the innocent injured party is held to a duty to mitigate reduce the damages they suffered Under the doctrine of mitigation of damages the duty owned depends on the nature of the contract D A liquidated damages provision in a contract specifies that a certain dollar amount is to be paid in the event of a future default or breach of contract A penalty also specifies a certain amount to be paid in the event of a default of a breach or contract but it is designed to penalize the breaching party not to make the innocent party whole a A court must answer two question to determine if a particular provision is for liquidated damages or penalty when the contract was entered into was it apparent that damages would be difficult to estimate in the event of a breach and was the amount set as damages a reasonable estimate and not excessive b Liquidated damages provisions are frequently used in construction contracts sale of goods and contracts with entertainers and professional athletes 4 Equitable Remedies A Damages are sometimes inadequate and the nonbreaching party can ask for the court for an equitable remedy rescission and restitution specific performance and reformation B Rescission is an action to undo terminate in a contract unilateral rescission is available when fraud a mistake duress undue in uence misrepresentation or lack of capacity to contract is present To rescind a contract both parties must make restitution to each other by returning goods property or funds previously conveyed C The equitable remedy of specific performance calls for the performance of the act promised in the contract Specific performance is not normally granted unless the party s legal remedy is inadequate a A court may grant specific performance to a buyer in an action for a breach of contract involved the sale of land b Courts generally refuse to grant specific performance of personal service contracts because to order a party to perform personal services against their will amounts to a type of involuntary servitude D Reformation is an equitable remedy used when the parties have imperfectly expressed their agreement in writing It allows a court to rewrite the contract to re ect the parties true intentions a Courts order reformation most when fraud or mutual mistake is present Chapter 10 Contract Performance Breach and Remedies b Courts will reform a contract when two parties enter into a binding oral contract but later make an error when they attempt to put the terms into writing Courts reform contracts when the parties have executed a written covenant not to compete but the area or time restraints are unreasonable 5 Waiver of Breach A A waiver is a knowing relinquishment of a legal right B When a waiver of a breach of contract occurs the party waiving the breach cannot take any later action on it C Businesspersons often waive breaches of contract to obtain whatever benefit is still possible out of the contract D A waiver by a contracting will not operate to waive subsequent additional or future breaches of contract a A pattern of conduct waives a number of successive breaches if a reasonable person would conclude that similar defective performance in the future would be acceptable The waiver prevents the nonbreaching party from declaring a contract at an end or rescinding the contract The contract continues but the nonbreaching party can recover damages caused by the defective or lessthanfull performance 6 Contract Provisions Limiting Remedies A A contract may include provisions stating that no damages can be recovered B for certain types of breaches or the damages will be limited to a maximum amount The UCC provides that in a contract for the sale of goods remedies can be limited C Whether a limitationofliability clause in a contract will be enforced depends on the type of breach that is excused by the provision Chapter 11 Sales and Lease Contracts 1 The Scope of Articles 2 Sales and 2A Leases A Article 2 of the UCC sets forth the requirements for sales contracts and the duties and obligations of the parties involved in the sales contracts Article 2A covers similar issues B Article 2 facilitates commercial transactions by modifying some of the common law contract requirements When a con ict arises between a common law contract rule and the UCC the UCC controls Article 2 deals with the sale of goods not real property services or intangible property The rules can vary depending on Whether the buyer or seller is a merchant a The UCC defines a sale as the passing of title from the seller to the buyer for a price b A good is an item of property that must be tangible and movable i Goods associated With real estate usually fall under Article 2 ii When contracts involve a combination of goods a services courts generally use the predominantfactor test to determine Whether a contract is primarily for the sale of goods or the sale of services c A merchant is someone Who deals in goods of the kind involved in the sales contract Who holds themselves out as having knowledge and kill unique to the practices or goods involved in the transaction by occupation and Who employs a merchant as a broker agent or other intermediary A person is a merchant When they acting in a mercantile capacity possesses or uses an expertise specifically related to the goods being sold C A lease is a transfer of the right to possess and use goods for a period of time in exchange for payment Article 2A covers any transaction that creates a lease of goods or a sublease of goods It is a repetition of Article 2 except that it applies to lease of goods a A lease agreement is a lessor s and lessee s bargain with respect to the lease of goods as found in their language and as implied by other circumstances 2 The Formation of Sales and Lease Contracts A Articles 2 and 2A of the UCC modify common law contract laws that only comes into play When the parties either fail to provide certain terms in their contract or Wish to the change the effect of the UCC s terms The parties are technically free to establish Whatever terms they Wish B The UCC states that an agreement sufficient to constitute a contract can exist even if the moment of its making is undetermined a UCC states that a sales or lease contract Will not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for the court to grant an appropriate remedy The UCC provides numerous openterm provisions that can be used to fill the gaps in a contract Chapter 11 Sales and Lease Contracts i If the parties have not agreed on a price the court will determine a reasonable price at the time for delivery If the buyer or seller sets the price it is to be done in good faith ii When parties do not specify payment terms payment is due at the time and place at which the buyer is to receive the goods iii When no delivery terms are specified the buyer normally takes delivery at the seller s place of business If the seller has no place of business the seller s residence is used b Requirements and output contracts are the exceptions to when parties do not specify a quantity and no contract is formed i In a requirements contract the buyer agrees to purchase and the seller agrees to sell all or up to a stated amount of what the buyer requires ii In an output contract the seller agrees to sell and the buyer agrees to but all or up to a stated amount of what the seller produces The UCC imposes good faith limitation on both requirements and output contracts 0 The UCC creates an exception for firm offers made by a merchant concerning the sale or lease of goods where an offer cannot be revoked at any time before acceptance i A firm offer is when a merchant offeror gives assurances in a signed writing that the offer will remain open It is irrevocable without the necessity of consideration for the stated period ii To qualify as a firm offer the offer must be written and signed by the offeror C The UCC permits acceptance of an offer to buy goods either by a prompt promise to ship or by either the prompt or current shipment of conforming or nonconforming goods a The UCC requires notification if the offeror is not notified within a reasonable time that the offeree has accepted the contract by beginning performance then the offeror can treat the offer as having lapsed before acceptance b The UCC dispenses with the mirror image rule A contract is formed if the offeree s response indicates a definite acceptance of the offer even if the acceptance includes terms additional to or different from those contained in the offer i If one or both of the parties is a nonmerchant the contract is formed according to the terms of the original offer and does not include any oft eh additional terms in the acceptance ii In contracts between merchants the additional terms automatically become party of the contract unless one of the following conditions arises the original offer expressly limited acceptance to its terms the new or changed terms materially Chapter 11 Sales and Lease Contracts alter the contract the offeror objects to the new or changed terms within a reasonable period of time iii The UCC provides that the offeree s response cannot be construed as an acceptance if it contains additional or different terms and is expressly conditioned on the offeror s assent to those terms iv The UCC provides that conduct by both parties that recognizes the existence of a contract is sufficient to establish a contract for sale even though the writings of the parties do not otherwise establish a contract D Sales and lease contracts also require consideration but the UCC does not E require a contract modification to be supported by new consideration The UCC contains Statutes of Frauds provisions covering sale and lease contracts Under those provisions sales contracts for goods more than 500 and lease contracts requiring payments of more than 1000 must be in writing to be enforceable a Writing email or other electronic record is sufficient to satisfy the Statute of Fraud as long as it indicates that the parties intended to form a contract and is signed by the party against whom enforcement is sought b There is a special rule for merchants in sales transactions Merchants can satisfy the Statute if one of the merchants sends a signed written confirmation to the other merchant within a reasonable time after the parties have agreed orally 0 There are 3 exceptions to the writing requirements of the Statutes of Frauds specially manufactured goods admissions and partial performance An unconscionable contract is one that is so unfair and one sided that it would be unreasonable to enforce it The UCC allows a court to evaluate a contract or any clause in it if the court deems it to have been unconscionable at the time it was made The court can refuse to enforce the contract enforce the remainder of the contract without the unconscionable part or limit the application of the unconscionable term to avoid an unconscionable result 3 Title and Risk of Loss A Title right of ownership has been replaced with identification risk of loss B and insurable interest Identification is when specific goods are designated as the subject matter of a sales or lease contract The goods must be inexistence and identified as the specific goods designated in the contract before any interest in specific goods can pass from the seller or lessor to the buyer or lessee a If the contract calls for the salelease of specific and ascertained goods that are already in existence identification takes place at the time the contract is made Chapter 11 Sales and Lease Contracts b Any goods not in existence at the time of contracting re known as future goods C Without explicit agreement to the contrary title passes to the buyer at the time and place the seller performs by delivering the goods a Unless otherwise agreed delivery arrangements can determine when title passes from seller to buyer In a shipment contract the seller is required or authorized to ship goods by carrier In a destination contract the seller is required to deliver the goods to a particular destination usually to the buyer b When a title document is required title passes to the buyer when and where the document is delivered D Under the UCC risk of loss does not necessarily pass with title Sometimes the contract states expressly when the risk of loss passes When it does not a court must interpret the terms to determine whether the risk has passed The UCC provides special rules based on delivery terms to guide the courts a When the contract involves movement of goods via a common carrier but does not specify when risk of loss passes the courts first look for specific delivery terms in the contract i In a shipment contract the seller or lessor is required or authorized to ship goods by carrier but not required to deliver to a particular destination ii In a destination contract the risk of loss passes to the buyer or lesee when the goods are tendered to the buyer or lessee at the specified destination b A bailment is a temporary delivery of personal property without passage of title into car of another called a bailee i When the seller keeps the goods for pickup a document of title usually is not used ii When a bailee is holding goods that are to be delivered under a contract without being moved the goods are usually represented by a document of title A document is negotiable or nonnegotiable depending on whether the transferee is a buyer or lessee and how it is transferred 0 When a sales or lease contract is breached the transfer of risk operates differently depending on which party breaches Generally the party in breach bears the risk of loss E A buyer or lesee as an insurable interest in identified goods The moment the contract goods are identified by the seller or lessor the buyer or lessee has a property interest in them A seller has insurable interest in goods as longa s they retain title to the goods 4 Performance of Sales and Lease Contracts A The performance that is required of the parties under a sales or lease contract consists of the duties and obligations each party has under the terms of the Chapter 11 Sales and Lease Contracts contract The basic obligation of the seller or lessor is to transfer and deliver the goods as stated in the contract B The basic duty of the seller or lessor is to deliver the goods called for under the contract to the buyer or lessee Conforming goods are goods that conform to the contract description in every way Tender of delivery occurs when the seller or lessor makes conforming goods available and gives the buyer or lessee whatever notification is reasonably necessary to enable the buyer or lessee to take delivery a If the contract does not indicate where the goods will be delivered then the place for deliver will be one of the following the seller s place of business the seller s residence or the location of the goods b In carrier contracts the seller fulfills the obligation to deliver the goods through either a shipment contract or a destination contract i A shipment contract requiresauthorizes the seller to ship goods by a carrier rather than deliver them at a particular destination ii In a destination contract the seller agrees to deliver conforming goods to the buyer at a particular destination The goods must be tendered at a reasonable hour and held at the buyer s disposal for a reasonable length of time c The perfect tender rule is that the seller or lessor has an obligation to ship or tender conforming goods which the buyer or lessee is then obligated to accept and pay for according o the terms of the contract and is obligated to deliver goods that conformed with the terms of the contract in every detail i A cure refers to the right of the seller or lessor to repair adjust or replace defective or nonconforming goods ii If a commercially reasonable substitute is available this substitute performance is sufficient tender to the buyer and must be used d The doctrine of commercial impracticability does not extend to problems that could have been foreseen such as increase in cost resulting from in ation i If the goods were identified at the time the contract was formed the parties are excused from performance when an unexpected event totally destroys goods through no fault of either party ii Two other exceptions to the perfect tender doctrine apply equally to both parties to sales and lease contracts the right of assurance and the duty of cooperation C The main obligation of the buyer or lessee under a sales or lease contract is to pay for the goods tendered in accordance with the contract a In absence of any specific agreements the buyer or lessee must make payment at the time and place the goods are received Chapter 11 Sales and Lease Contracts b Unless the parties otherwise agree or for collect on delivery transactions the buyer or lessee has an absolute right to inspect the goods before making payment If the goods are not as ordered the buyer or lessee has no duty to pay The buyer or lessee can demonstrate acceptance with words or conduct failing to reject the goods within a reasonable amount of time or if they perform any act inconsistent with the seller s ownership D When anticipatory repudiation occurs the nonbreaching party has a choice to treat the repudiation as a final breach by pursuing a remedy or wait to see if the repudiating party will decide to honor the contract despite the avowed intention to renege 5 Remedies for Breach of Sales and Lease Contracts A When one party fails to carry out the performance promised in a contract a breach occurs and the aggrieved party looks for remedies The remedies range from retaining goods to requiring the breaching party s performance under the contract B When the buyer or lessee is in breach the remedies available to the seller or lessor depend on the circumstances at the time of the breach such as which party has possession of the goods a b If the buyer or lessee breaches the contract the seller or lessor can choose to simply cancel the contract In general sellers and lessors can withhold delivery or discontinue performance of their obligations under sales or lease contracts when the buyer or lessees are in breach When a buyer or lessee breaches or repudiates the contract while the seller or lessor is in possession of the goods the seller or lessor can resell or dispose of the goods An unpaid seller or lessor can bring an action to recover the purchase price or the payments due under the lease contract plus incidental damages If a buyer or lessee repudiates a contract or wrongfully refuses to accept the goods a seller or lessor can bring an action to recover the damages sustained C Remedies available to buyers and lessees depend on the circumstances existing at the time of the breach a When a seller or lessor fails to make proper delivery or repudiates the contract the buyer or lessee is relieved of any further obligations under the contract but retains all rights to other remedies against the seller or lessor If a buyer or lessee has partially or fully paid for goods that are in possession of a seller or lessor who becomes insolvent the buyer or lessee can obtain the goods Chapter 11 Sales and Lease Contracts 0 A buyer or lessee can obtain specific performance if the goods are unique or the remedy at law is inadequate d In certain situations buyers and lessees can protect themselves by obtaining cover by buying or leasing substitute goods for those that were due under the contract e Buyers and lessees have the right to replevy goods Replevin is an action to recover identified goods in the hands of a party who is unlawfully withholding them f If a seller or lessor repudiates the contract or fails to deliver the goods the buyer or lessee can sue for damages g If either the goods or their tender fails to conform to the contract in any respect the buyer or lessee can reject all of the goods or on any commercial unit of goods h Acceptance of the goods precludes the buyer or lessee from exercising the right of rejection but it does not necessarily prevent the buyer or lessee from pursuing other remedies i A buyer or lessee who has accepted nonconforming goods may also keep the goods and recover damages D The parties to a sales or lease contract can vary their respective rights and obligations by contractual agreement An agreedon remedy is in addition to those provided in the UCC unless the parties expressly agree that the remedy is exclusive of all others 6 Sales and Lease Warranties A The UCC has numerous rules governing product warranties as they occur in sales and lease contracts Articles 2 and 2A designate several types of warranties that can arise in a sales or lease contract including warranties of title express warranties and implied warranties B Under the UCC three types of title warranties good title no liens and no infringements can automatically arise in sales and lease contracts a merchant promises that the goods delivered are free from any copyright trademark or patent claims of a third person C A seller or lessor can create an express warranty by making representations concerning the quality condition description or performance potential of the goods a To create an express warranty a seller or lessor does not have to use formal words such as warrant or guarantee It is only necessary that a reasonable buyer or lessee would regard the representation as being part of the basis of the bargain b Only statements of fact create express warranties A seller or lessor who makes a statement that merely relates to the value or worth of the goods or states an opinion about or recommends the goods does not create an express warranty D An implied warranty is one that the law derives by inference form the nature of the transaction or the relative situations or circumstances of the parties Chapter 11 Sales and Lease Contracts a Every sale or lease of goods made by a merchant who deals in goods of the kind sold or leased automatically gives rise to an implied warranty of merchantability b The implied warranty of fitness for a particular purpose arises when any seller or lessor knows the particular purpose for which a buyer or lessee will use the goods and knows the buyer or lessee is relying on the skill and judgment of the seller or lessor to select suitable goods 0 Implied warranties can also arise as a result of course of dealing or usage of trade E The UCC generally permits warranties to be disclaimed or limited by specific and unambiguous language provided that the buyer or lessee is protected from surprise The manner in which a seller or lessor can disclaim warranties caries depending on the type of warranty 7 Contracts for the International Sale of Goods A The 1980 United Nations Convention on Contracts for the International Sale of Goods may govern international sales contracts between firms or individuals located in different countries B CSIG is to international sales contracts what Article 2 of the UCC is to domestic sales contracts However the CSIG does not apply to consumer sales C The provisions of the CSIG do differ from the UCC mirror image rule and irrevocable offers Under the UCC an acceptance that contains additional terms can still result in the formation of a contract unless the additional terms are conditioned on the consent of the offeror D The CISG provides international sellers and buyers with remedies very similar to those available under the UCC Chapter 12 Torts 1 The Basis of Tort Law A B D Tort law is designed to compensate those who have suffered a loss or injury due to another person s wrongful act The purpose of tort law is to provide remedies for the violation of various protected interests such as personal physical safety and property Damage refers to harm or injury to persons or property and damages refers to monetary compensation for the damage Plaintiffs can seek different types of damages in tort actions a Compensatory damages are awarded to compensate or reimburse the plaintiff for actual losses The goal is to make the plaintiff whole and put them in the same position that they would have been in if the tort didn t happen Special damages compensate for quantifiable monetary losses General damages compensate for nonmonetary aspects of harm suffered b Punitive damages are meant to punish the wrongdoer and deter others from similar wrongdoing They are only appropriate when the defendant s conduct was particularly reprehensible Gross negligence can be defined as an intentional failure to perform a manifest duty in reckless regard of the consequences of such a failure for the life or property of another Tort law is valuable because it enables injured parties to obtain compensation but critics contend that it is a system that disproportionately rewards a few plaintiffs and imposes a tort tax on businesses and society as a whole a The federal government and some states have begun to take some steps towards tort reform by limiting the amount of punitive and general damages that can be awarded capping the amount attorneys can collect in contingency fees and requiring the losing party to pay both parties expenses b The Class Action Fairness Act of 2005 shifted jurisdiction over large interstate tort and product liability classaction law suits from the state courts to the federal courts c More than half of the states placed caps on noneconomic general damages Most states have limited punitive damages some imposing outright bans There are two broad classifications of torts intentional and unintentional torts involving negligence The defendant can raise a number of legally recognized defenses reasons the plaintiff should not obtain the damages A successful defense releases the defendant from partial or full liability for the tortious act 2 Intentional Torts Against Persons A An intentional tort requires intent The tortfeasor committing the tort must intend to commit an act with consequences that interferes with another s personal or business interests in a way not permitted by law Transferred Chapter 12 Torts intent is when the defendant intends to harm one individual but unintentionally harms a second B Assault is any intentional and unexcused threat of immediate harmful or offensive contact words or acts that create a reasonably believable threat C If the act that created the apprehension is completed and results in harm to the plaintiff it is battery an unexcused and harmful or offensive physical contact intentionally performed D False imprisonment is the intentional confinement or restraint of another person s activities without justification It interferes with the freedom to move without restraint E Intentional in iction of emotional distress is an intentional act that amounts to extreme and outrageous conduct resulting in severe emotional distress to another The act must be extreme and outrageous to the point that it exceeds the bounds of decency accepted by society in order to be grounds for a lawsuit a Courts in most jurisdictions are wary of emotional distress claims and confine them to situations involving truly outrageous behavior b The First Amendment limits emotional distress claims when it comes to speeches about public figures F Defamation of character involves wrongfully hurting a person s good reputation In order to establish defamation the plaintiff normally must prove that the defendant made a false statement of fact the statement was understood as being about the plaintiff and tended o harm the plaintiff s reputation the statement was published to at least one person other than the plaintiff and if the plaintiff is a public figure then they must prove actual malice a Making a negative statement about another person is only defamation if it is false and represents something as a fact rather than personal opinion b Publication means that the defamatory statements are communicated to persons other than the defamed party c To recover damages for libel the plaintiff does not need to prove that they were harmed in any specific way as a result of the statement d To recover damages for slander the plaintiff must prove special damages to establish the defendant s liability e Slander is actionable with no proof of special damages required when the statement constitutes slander per se which consists of a statement that another has a particular type of disease a statement that another has committed improprieties while engaging in a profession or trade a statement that another has committed or has been imprisoned for a serious crime or a statement that a person is unchaste or has engaged in serious sexual misconduct f Truth is an absolute defense against a defamation charge Privileged speech and speech about a public figure are also defenses Chapter 12 Torts i Sometimes a person will not be liable for defamatory statements because they enjoy a privilege immunity Absolute privilege is only granted in judicial proceedings and certain government proceedings where statements made by certain officials are absolutely privileged In other situations a person won t be liable for defamatory statements because they have qualified conditional privilege ii Public figures are considered fair game and false and defamatory statements about them published in media do not constitute defamation unless the statements are made with actual malice A statement must be made with either knowledge of its falsity or a reckless disregard of the truth to be made with actual malice G To successfully sue for an invasion of privacy the person must have a reasonable expectation of privacy and the invasion must be highly offensive a Four acts qualify as an invasion of privacy under the common law intrusion into an individual s affairs or seclusion false light public disclosure of private facts and appropriation of identity b Most states today have codified the common law tort of appropriation of identity in statutes that establish the distinct tort of appropriation or right of publicity H Fraudulent misrepresentation involves intentional deceit for personal gain and the tort includes a misrepresentation of material facts or conditions with knowledge that they are false or with reckless disregard for the truth an intent to induce another party to rely on the misrepresentation a justifiable reliance on the misrepresentation by the deceived party damages suffered as a result of that reliance and a causal connection between the misrepresentation and the injury suffered I A party can be sued for malicious prosecution if they initiated a lawsuit out of malice and without a legitimate legal reason Abuse of process can apply to any person using a legal process against another in an improper manner 3 Business Torts A Business torts involve wrongful interference with another s business rights and generally fall into two categories interference with a contractual relationship and interference with a business relationship B There are three elements to wrongful interference with a contractual relationship a valid and enforceable contract must exist between two parties a third party must know that this contract exists and the third party must intentionally induce a party to the contract to breach it C A plaintiff must prove that the defendant used predatory methods actions undertaken with the intention of unlawfully driving competitors completely out of the market to intentionally harm an established business relationship or prospective economic advantage Chapter 12 Torts D A person will not be liable for business torts if it can be shown that the interference was justified or permissible Bona fide competitive behavior is a permissible interference even if it results in the breaking of a contract 4 Intentional Torts Against Property A Intentional torts against property include trespass to land trespass to personal property conversion and disparagement of property These actions interfere with individual s legally recognized rights with regard to their land or personal property Real property is land and things permanently attached to the land and personal property consists of all other items B A trespass to land is when a person without permission enters onto above or below the surface of land that is owned by another causes anything to enter onto land owned by another or remains on land owned by another or permits anything to remain on it a The real property owner must establish that a person is a trespasser b According to common law trespassers are liable for any damage cause to property and cannot hold owner liable for injuries sustained on the premise c A defense to a claim of trespass is when the trespass was warranted such as to assist someone in danger or if they hold a license for it C Trespass to personal property is whenever an individual wrongfully takes or harms the personal property of another or otherwise interferes with the lawful owner s possession and enjoyment of personal property D Conversion is any act that deprives an owner of personal property or of the use of that property without the owner s permission and without just cause Good intentions are not a defense against conversion E Disparagement of property is when economically injurious falsehoods are made about another s product or property than about another s reputation It can specifically be referred to as slander of quality or slander of title a Slander of quality trade libel is the publication of false information about another s product alleging that it is not what its seller claims b Slander of title is when a publication falsely denies or casts doubt on another s legal ownership of property resulting in financial loss to the property s owner 5 Unintentional Torts Negligence A The tort of negligence is when someone suffers injury because of another s failure to live up to a required duty of care to succeed in a negligence action the plaintiff must prove duty breach causation and damages B Duty of care is the basic principle that people are free to act as they please so long as their actions do not infringe on the interests of others Failure to live up to a standard of care may be an act or an omission a Tort law measures duty by the reasonable person standard It is society s judgment of how an ordinarily prudent person should act rather than how one would act Chapter 12 Torts C F G b Landowners are expected to exercise reasonable care to protect individuals coming onto their property from harm i Retailers and other companies that explicitly or implicitly invite persons to come onto their premises have a duty to exercise reasonable care to protect the business invitees ii Some risks are so obvious that an owner need not warn of them c If a professional violates their duty of care toward a client the client may bring a suit against the professional malpractice which is essentially professional negligence If a person breaches a duty of care and someone suffers an injury the person s act must have caused the harm for it to constitute the tort of negligence causation a The court must answer two questions when determining whether causation was met is there causation in fact and was the act the proximate or legal cause of the injury Causation in fact can be determined by use of the but for test but for the wrongful act the injury would not have occurred Proximate cause legal cause exists when the connection between an act and an injury is strong enough to justify imposing liability b Does a defendant s duty of care extend only to those who may be injured as a result of foreseeable risk or does it also extend to a person whose injury could not reasonably have been foreseen For a tort to be committed the plaintiff must have suffered a legally recognizable injury To recover damages the plaintiff must have suffered some loss harm wrong or invasion of a protected interest Negligence per se occurs if an individual violates a statute or an ordinance providing for a criminal penalty and then violation causes another to be injured Under Good Samaritan Statutes someone who is aided voluntarily by another cannot turn around and sue the Good Samaritan for negligence Under the dram shop acts a bar s owner or bartender may be held liable for injuries caused by a person who became intoxicated while drinking at the bar Defenses to Negligence A Defendants often defend against negligence claims by asserting that the plaintiffs have failed to prove the existence of one or more of the required elements for negligence There are three basic affirmative defenses in negligence cases assumption of risk superseding cause and contributory and comparative negligence The assumption of risk defense requires the plaintiff s knowledge of the risk and voluntary assumption of the risk A plaintiff who voluntarily enters into a risky situation knowing the risk involved will not be allowed to recover A superseding cause relieves the defendant of liability for injuries caused by an unforeseeable intervening event Chapter 12 Torts D Under the common law doctrine of contributory negligence a plaintiff Who was also negligent could not recover anything from the defendant Few jurisdictions still hold this doctrine today E Contributory negligence has been mostly replaced by a comparative negligence standard under Which both the plaintiff and defendant s negligence are computed and the liability for damages is distributed accordingly Chapter 13 Strict Liability and Product Liability 1 Strict Liability A Strict liability is the idea that people are liable for all damage which is the B natural consequence of its escape One application of strict liability is for damages proximately caused by an abnormally dangerous or ultrahazardous activity is one application of strict liability Persons who keep wild animals are strictly liable for any harm in icted by the animals Liability is a matter of social policy and is based on two factors the manufacturer can bear the cost of injury because it can spread the cost throughout society by increasing the price of its goods and is making profit from its activities and therefore should bear the cost of injury as an operating expense 2 Product Liability A Those who make sell or lease goods can be held liable for physical harm or property damage caused by those to a consumer user or bystander Product liability may be based on theories of negligence misrepresentation strict liability and warranties If a manufacturer fails to exercise due care to make a product safe a person who is injured by the produce may sue the manufacturer for negligence a Manufacturers must use due care in designing the product selecting the materials using the appropriate production process assembling and testing the product placing adequate warnings on the label to inform the user of dangers of which an ordinary person might not be aware and inspecting and testing any purchased components used in the product b Product liability action based on negligence does not require privity of contract between the injured plaintiff and the defendantmanufacturer C When a user or consumer is injured as a result of a manufacturer or seller s fraudulent misrepresentation the basis of liability may be the tort of fraud The misrepresentation must have been made knowingly or with reckless disregard for those facts 3 Strict Liability A Courts applied the doctrine of strict liability in several landmark cases involving manufactured goods and it has since become a common method of holding manufacturers liable The law imposes strict product liability as a matter of public policy under the assumption that consumers should be protected against unsafe products manufacturers and distributors should not escape liability for faulty products simply because they are not in privity of contract with the ultimate user of those products and manufacturers and distributors can better bear the costs associated with injuries caused by their products because they can ultimately pass the costs on to all consumers in the form of higher prices Chapter 13 Strict Liability and Product Liability a b Today majority of states recognize strict product liability although some state courts limit its application to situations involving personal injuries rather than property damage Public policy may be expressed in a statute or in the common law but it may also be revealed in a court s interpretation of a statute C Section 402A of the Restatement Second of Torts has six requirements in order for a manufacturer to be held liable the product must be in a defective condition when the defendant sells it the defendant must normally be engaged in the business of selling that product the product must be unreasonably dangerous to the user or consumer because of its defective condition the plaintiff must incur physical harm to self or property by use or consumption of the product the defective condition must be the proximate cause of the injury or damage and the goods must not have been substantially changed from the time the product was sold to the time the injury was sustained a The plaintiff doesn t have to prove in what manner the product became defective but that it was defective at the time it left the hands of the seller or lessor Sellers or lessors are liable only for products that are unreasonably dangerous such as when the product was dangerous beyond the expectation of the ordinary consumer or a less dangerous alternative was economically feasible for the manufacturer but the manufacturer failed to produce it D The Restatement Third of Torts Products Liability defines 3 types of product defects that have traditionally been recognized din product liability law manufacturing defects design defects and inadequate warnings a b A manufacturing defect is a departure from a product unit s design specifications that results in products that are physically awed damaged or incorrectly assembled i Liability is imposed on the manufacturer regardless of whether the manufacturer s quality control efforts were reasonable This encourages greater investment in product safety and stringent quality control standards ii Cases involving allegations of a manufacturing defect are often decided based on the opinions and testimony of experts A product with a design defect is made in conformity with the manufacturer s design specifications To successfully assert a design defect a plaintiff has to show that a reasonable alternative design was available and the defendant s failure to adopt the alternative design rendered the product not reasonably safe i Most courts engage in a riskutility analysis to determine whether the risk of harm from the product as designed outweighs its utility to the user and to the public ii Other courts apply the consumerexpectation test to determine whether a product s design was defective A product is Chapter 13 Strict Liability and Product Liability E F unreasonably dangerous when it fails to perform in the manner than would reasonably be expected by an ordinary consumer c A product may be deemed defective because of inadequate instructions or warnings Important factors for a court to consider include the risks of a product the content and comprehensibility and intensity of expression of warnings and instructions and the characteristics of expected user groups Courts apply a reasonableness test to determine if the warnings adequately alert consumers to the product s risks 1 There is no duty to warn about risks that are obvious or commonly known e A seller must warn those who purchase its product of the harm that can result from the foreseeable misuse of the product as well Under a theory of marketshare liability a court can hold each manufacturer responsible for a percentage of the plaintiff s damages that is equal to the percentage of its market share Almost all courts extend the strict liability of manufacturers and other sellers to injured bystanders 4 Defenses to Product Liability A B Defendants in product liability suits can raise a number of defenses such as showing that there is no basis for the plaintiff s claim One defense is preemption government regulations preempt claims for product liability A defense is assumption of risk where the defendant must prove the plaintiff knew and appreciated the risk created by the product defect and voluntarily assumed the risk even though it was unreasonable to do so Product misuse occurs when a product is used for a purpose for which it was not intended This is only recognized as a defense when the particular use was not foreseeable Comparative negligence differs from other defenses in that it does not completely absolve the defendant of liability but it can reduce the total amount of damages that will be awarded to the plaintiff The dangers associated with certain products are so commonly known that as mentioned manufacturers need not warn users of those dangers The knowledgeable user defense is when a particular danger is or should be commonly known by particular users of a product thus the manufacturer need not warn these users of the danger Many states have passed statutes of repose which place outer time limits on product liability actions Chapter 14 Intellectual Property Rights 1 Trademarks and Related Property A A trademark is a distinctive mark motto device or implement that a manufacturer stamps prints or otherwise affixes to the goods it produces so that they can be identified on the market and their origins made known basically a source indicator B Statutory protection of trademarks and related property is provided at the federal level by the Lanham Act of 1946 which was enacted to protect manufacturers from losing business to rival companies that used confusingly similar trademarks a The Federal Trademark Dilution Act allowed trademark owners to bring suits in federal court for trademark dilution Under the Trademark Dilution Revision Act in order to claim for trademark dilution the plaintiff must prove the plaintiff owns a famous mark that is distinctive the defendant has begun using a mark in commerce that allegedly is diluting the famous mark the similarity between the defendant s mark and the famous mark gives rise to an association between the marks and the association is likely to impair the distinctiveness of the famous mark or harm its reputation b A similar mark is more likely to lessen the value of a famous mark when the companies using the marks provide related goods or compete against each other in the same market C Trademarks can be registered with the state or federal government A person must file an application with the US Patent and Trademark Office in Washington DC in order to register for protection under federal trademark law D Whenever a registered trademark has been copied to a substantial degree or used in its entirety by another whether it was intentional or not the trademark has been infringed At this point the owner of the mark has the right to file for an injunction E A trademark must be sufficiently distinctive to enable consumers to identify the manufacturer of the goods easily and to distinguish between those goods and competing products a Fanciful arbitrary or suggestive trademarks are generally considered the strongest and are protected as inherently distinctive without demonstrating secondary meaning i Fanciful trademarks include invented words Arbitrary trademarks use common words in an uncommon way that is nondescriptive ii Suggestive trademarks indicate something about a product s nature quality or characteristics without describing the product s nature quality or characteristics without describing the product directly b Descriptive terms geographic terms and personal names are not inherently distinctive and do not receive protection under the law until Chapter 14 Intellectual Property Rights F they acquire a secondary meaning Once a secondary meaning is attached to a term or name a trademark is considered distinctive and is protected 0 Generic terms that refer to an entire class of products receive no protection even if they acquire secondary meanings A service mark is essentially a trademark that is used to distinguish the services of one person or company from those of another The law also protects certification and collective marks Certification marks certify the region materials and mode of manufacture quality or other characteristic of specific goods or services Collective marks appear at the end of motion picture credits to indicate the various associations and organizations that participated in the making of the films A trade dress refers to the image and overall appearance of a product It is subject to the same protection as trademarks Counterfeit goods copy or otherwise imitate trademark goods but they are not the genuine trademarked goods a The Stop Counterfeiting in Manufactured Goods Act was enacted to combat counterfeit goods This makes it a crime to traffic intentionally in or attempt to traffic in counterfeit goods or services or to knowingly use a counterfeit mark on or in connection with goods or services b Persons found guilty of violating the SCMGA may be fined up to 2 million or imprisoned for up to ten years If found guilty the defendant must forfeit the goods and pay restitution A trade name indicates part or all of a business s name whether the business is a sole proprietorship a partnership or a corporation It is generally directly related to a business and its goodwill A license in this context is an agreement or contract permitting the use of a trademark copyright patent or trade secret for certain purposes It only grants the rights expressly described in the license agreement 2 Patents A A patent is a grant from the government that gives an inventory the exclusive B C right to make use or sell his or her invention for a period of twenty years The website of the US Patent and Trademark Office provides searchable databases covering US patents granted since 1976 To be patentable the applicant must prove that the invention discovery process or design is novel useful and not obvious If a firm makes uses or sells another s patented design product or process without the patent owner s permission that firm commits the tort of patent infringement a Companies that specialize in developing new technology stand to lose significant profits if someone makes uses or sells devices that incorporate their patented inventions Chapter 14 Intellectual Property Rights b Under US law no patent infringement occurs when a patented product is made and sold in another country 0 Apple sued Samsung alleging that Samsung s Galaxy mobile phones and tablets that use Google s HTC Android operating system infringe on Apple s patents Apple won E If a patent is infringed the patent holder may sue for relief in federal court The patent holder can seek an injunction against the infringer and can also request damages for royalties and lost profits 3 Copyrights A A copyright is an intangible property right granted by federal statute to the E author or originator of a literary or artistic production of a specified type Copyright owners are generally protected against reproduction of the work development of derivative works distribution of the work and public display of the work To be protected a work must be fixed in a durable medium from which it can be perceived reproduced or communicated a An idea cannot be copyrighted What can be copyrighted is the particular way in which an idea is expressed b Compilations of facts are copyrightable A compilation is a work from the collection and assembling of preexisting materials or data that are selected coordinated or arranged in such a way that the resulting work as a whole constitutes an original work of authorship Whenever the form or expression of an idea is copied an infringement of copyright has occurred The reproduction does not have to be exactly the same as the original nor does it have to reproduce the original in its entirety it only has to be a substantial part of the original being reproduced a Those who infringe copyrights may be liable for damages or criminal penalties Actual damages are based on the harm caused to the copyright holder by the infringement while statutory damages are provided for under the Copyright Act b An exception to liability is under the fair use doctrine In certain circumstances a person or organization can reproduce copyrighted material without paying royalties c The courts determine whether a particular use is fair on a casebycase basis Under the first sale doctrine once a copyright owner sells or gives away a particular copy of a work the copyright owner no longer has the right to control the distribution of that copy The Computer Software Copyright Act included computer programs in the list of creative works to be protected by federal copyright law 4 Trade Secrets A A trade secret is basically information of commercial value such as customer lists plans and research and development The law of trade secrets protects Chapter 14 Intellectual Property Rights C some business processes and information that are not or cannot be patented copyrighted or trademarked against appropriation by competitors Those who disclose or use another s trade secret without authorization are liable to that other party if they discovered the secret by improper means or their disclosure or use constitutes a breach of a duty owed to the other party Computer technology is undercutting many business firms ability to protect their confidential information including trade secrets 5 International Protection for Intellectual Property A The US has been a party to various international agreements relating to B intellectual property rights Under the Berne Convention of 1886 if a US citizen writes a book every country that has signed the convention must recognize the US author s copyright in the book Copyright notice is not needed to gain protection under the Berne Convention for works published after March 1 1989 The TRIPS agreement established standards for the international protection of intellectual property rights including patents trademarks and copyrights for movies computer programs books and music The Madrid Protocol is an international treaty that has been signed by eighty siX countries and under its provisions a US company wishing to register its trademark abroad can submit a single application and designate other member countries in which the company would like to register its mark The AntiCounterfeiting Trade Agreement was an international treaty to combat global counterfeiting and piracy a The goals of the treaty are to increase international cooperation facilitate the best law enforcement practices and provide a legal framework to combat counterfeiting b Under the ACTA member nations are required to establish border measures that allow officials on their own initiative to search commercial shipments of imports and exports for counterfeit goods Chapter 15 Internet Law Social Media and Privacy 1 Internet Law A A number of laws specifically address issues that arise only on the Internet B Businesses and individuals are targets of spam unsolicited junk email that oods virtual mailboxes with advertisements solicitations and other messages a Many state laws that regulate spam require senders of email ads to instruct the recipients on how they can opt out of further email ads from the same sources b The Controlling the Assault of NonSolicited Pornography and Marketing CANSPAM Act preempts antispam laws except for those provisions on state laws that prohibit false and deceptive e mailing practices This generally permits unsolicited commercial e mail but prohibits certain types of spamming activities 0 The US Safe Web Act allows the FTC to cooperate and share information with foreign agencies in investigating and prosecuting those involved in spamming spyware and various Internet frauds and deceptions It provides a safe harbor for Internet service providers by giving immunity from liability for supplying information to the FTC concerning possible unfair or deceptive conduct in foreign countries C Ecommerce led to the issue of the rights of a trademark owner to use the mark as part of a domain name a Every domain name ends with a generic toplevel domain which is the name to the right of the period that indicates the type of entity that operates the site The secondlevel domain is chosen by the business entity or individual and is the part of the name to the left of the period Goodwill the nontangible value of a business b The Internet Corporation for Assigned Names and Numbers ICANN oversees the distribution of domain names and operates an online arbitration system D One of the goals of the new generic TLD system is to alleviate the problem of cybersquatting when a person registers a domain name that is the same as or confusingly similar to the trademark of another and then offers to sell the domain name back to the trademark owner a The Anticybersquatting Consumer Protection Act makes cybersquatting illegal when the name is identical or confusingly similar to the trademark of another and the one registering trafficking in or using that domain name has a bad faith intent to profit form that trademark b Cybersquatting continues to be a problem for businesses Registrar companies charge a fee to businesses and individuals to register new names and to renew annual registrations c Typosquatting is registering a name that is a misspelling of a popular brand Cybersquatting is costly for businesses which must attempt to Chapter 15 Internet Law Social Media and Privacy register all variations of a name to protect their domain rights from wouldby cybersquatters and typosquatters d The ACPA applies to all domain name registrations of trademarks Search engines compile their results by looking through a website s keyword field Meta tags are key words that are inserted into the HTML code to tell Internet browsers specific information about a web page Using another s trademark in a meta tag without the owner s permission normally constitutes trademark infringement Trademark dilution is when a trademark is used without authorization in a way that diminishes the distinctive quality of the mark Licensing is ubiquitous in the online world Licensing agreements frequently include restrictions that prohibit licensees from sharing the file and using it to create similar software applications It may also limit the use of the application to a specific device or give permission to the user for a certain time period 2 Copyrights in Digital Information A Copyright law is the most important form of intellectual property protection on the Internet Congress extended criminal liability for the piracy of copyrighted materials to persons who exchange unauthorized copies of copyrighted works without realizing a profit The Digital Millennium Copyright Act DMCA gave significant protection to owners or copyrights in digital information It established civil and criminal penalties for anyone who circumvents encryption software or other technological antipiracy protection A few enterprising programmers created software to compress large data files and allowed filesharing via the Internet a Filesharing is done through peertopeer networking which uses numerous personal computers that are connected to the Internet Individuals on the same network can access files stored on another s PCs through a distributed network A newer method of sharing files via the Internet is cloud computing subscription based or payperuse service that extends a computer s software or storage capabilities b When filesharing is used to download others stored music files copyright issues arise c Filesharing also creates problems for the motion picture industry which loses significant amounts of revenue annually as a result of pirated DVDs 3 Social Media A Social media provides a means by which people can create share and B exchange ideas and comments via the Internet The emergence of Facebook and other social networking sites has created a number of legal and ethical issues for business Social media posts can provide damaging information that establishes a person s intent or what they knew at a particular time in litigation Chapter 15 Internet Law Social Media and Privacy a Law enforcement uses social media to detect and prosecute criminals b Federal regulators also use social media posts in their investigations into illegal activities 0 Employees who use social media in a way that violates their employer s stated policies may be disciplined or fired from their jobs However employees posts on social media may sometimes be protected under labor laws C The Electronic Communications Privacy Act ECPA amended federal wiretapping laws to cover electronic forms of communication It prohibits intentional interception of any wire oral electronic communication intentional disclosure or use of the information obtained by the interception a Any electronic communications through devices that an employer provides for its employee to use in the ordinary course of its business is excluded form the ECPA s coverage b Part of the ECPA is known as the Stored Communications Act SCA which prohibits intentional and unauthorized access to stored electronic communications and sets forth criminal and civil sanctions for violators D Recently employees and applicants for jobs or colleges have sometimes been asked to divulge their social media passwords By 2013 four states including California had enacted legislation to protect individuals from having to disclose their social media passwords E Many companies form their own internal social media networks Employees use these intranets to exchange messages about topics related to their work a An internal system for employee communications is an important advantage in that the company can better protect its trade secrets b Internal social media also offers additional benefits such as realtime information about important issues such as production glitches 4 Online Defamation A Cyber torts are torts that arise from online conduct One of the most prevalent cyber torts is online defamation wrongfully hurting a person s reputation by communicating false statements about that person or others B An initial issue raised by online defamation is discovering who is committing it An Internet service provider can disclose personal information about its customer only when ordered to do so by a court Using the authority of the courts the plaintiffs can obtain from the ISPs the identity of the persons responsible for the defamatory messages C One who repeats or otherwise republishes a defamatory statement is subject to liability as if they had originally published it Applying this rule to cyberspace raises an issue though a Under the Communications Decency Act CDA ISPs are usually treated differently from publishers in print and other media and are not liable for publishing defamatory statements that come from a third party Chapter 15 Internet Law Social Media and Privacy b Courts generally construe the CDA as proving a broad shield to protect ISPs from liability for third party content but some courts have started establishing some limits to that immunity 5 Privacy A Facebook Google and Yahoo have been accused of violating users privacy rights To maintain a suit for the invasion of privacy a person must have a reasonable expectation of privacy when they enter their personal banking or creditcard information online Whenever a consumer purchases items from an online retailer or a retailer that sells both of ine and online the retailed collects information about the consumer Cookies are invisible files that computers smartphones and other mobile devices create to track a user s web browsing activities The Federal Trade Commission investigates consumer complaints of privacy violations and force many companies to enter a consent decree that gives them broad power to review their privacy and data practices They can then sue companies that violate the terms of the decree To protect consumers personal information the Obama administration has proposed a consumer privacy bill of rights The goal is to ensure that personal information is safe online Chapter 16 Creditor Debtor Relations and Bankruptcy 1 Laws Assisting Creditors A Common law and statutory laws create various rights and remedies for creditors when a debtor defaults fails to pay as promised B A lien is an encumbrance on property to satisfy a debt or protect a claim for the payment of a debt Liens can be important for creditors because they generally take priority over other claims except those who have a perfected security interest in the same property Perfection is the legal process by which a creditor protects its security interest from the claims of others a A mechanic s lien creates a special type of debtorcreditor relationship in which the real estate itself becomes security for the debt This is when a person who has contracted for labor service or materials to be furnished for making improvements on real property does not pay for the improvements b An artisan s lien is relevant when a debtor fails to pay for labor and materials furnished for the repair or improvement of personal property and the creditor wants to recover payment i The lienholder ordinarily must have retained possession of the property and have expressly or impliedly agreed to provide the services on a cash not a credit basis ii Modern statutes permit the holder of an artisan s lien to foreclose and sell the property subject to the lien to satisfy the debt c When a debt is past due a creditor can bring a legal action against the debtor to collect the debt i An attachment is a courtordered seizure and taking into custody of property before a judgment is obtained on a past due debt A writ of attachment directs the sheriff or other officer to seize the debtor s nonexempt property ii A writ of execution is an order that directs the sheriff to seize and sell any of the debtor s nonexempt real or personal property It only applies to property within the court s geographic jurisdiction C An order of garnishment permits a creditor to collect a debt by seizing property of the debtor that is being held by a third party The debtor s employer may be ordered by the court to turn over a portion of the debtor s wages to pay the debt a State law governs garnishment actions so specific procedures vary from state to state b Both federal and state laws limit the amount that can be taken from a debtor s weekly takehome pay through garnishment proceedings D Creditors composition agreements are when creditors contract with the debtor for discharge of the debtor s liquidated debts on payment of a sum less than that owed 2 Mortgages Chapter 16 Creditor Debtor Relations and Bankruptcy A A mortgage is a written instrument that gives the creditor an interest in or lien on the debtor s real property as security for payment of a debt Borrowers typically make a down payment as part of the mortgage loan A fixedrate mortgage has a fixed or unchanging rate of interest so the payments remain the same for the duration of the loan An adjustablerate mortgage is the rate of interest paid by the borrower changing periodically The initial interest rate is set at a relatively low fixed rate for a specified period then the interest rate adjusts by some time period When creditors extend mortgages they are advancing a significant amount of funds for a number of years Creditors do however take certain steps to protect their interest a One precaution is to require debtors to obtain private mortgage insurance if they do not make a down payment of at least 20 percent of the purchase price b The creditor will record the mortgage with the appropriate office in the county where the property is located c Creditors include provisions in the mortgage contract that are aimed at protecting their investment such as a prepayment penalty clause requires the borrower to pay a penalty if the mortgage is repaid in full within a certain period If the homeowner defaults or fails to make the mortgage payments the lender has the right to foreclose on the mortgaged property Foreclosure is the legal process by which the lender repossesses and auctions off the property that has secured the loan a If the borrower might be able to make payments in the future the lender may grant forbearance which is a postponement of part or all of the payments on a loan for a limited time A workout agreement is a contract that describes their respective rights and responsibilities as they try to resolve the default without proceeding to foreclosure A short sale is a sale of the property for less than the balance due on the mortgage loan b If all efforts to find another solution fail the lender will proceed to foreclosure The lender must strictly comply with the state statute governing foreclosures c The right of redemption is the right of a defaulting borrower to redeem the property before the foreclosure by paying the full amount of the debt plus any interest and costs that have accrued 3 Suretyship and Guaranty A When a third person promises to pay a debt owed by another in the event that the debtor does not pay either a Suretyship or guaranty relationship is created They provide creditors with the right to seek payment from the third party of the primary debtor defaults on their obligations Chapter 16 Creditor Debtor Relations and Bankruptcy B A contract of strict Suretyship is a promise made by a third person to be responsible for the debtor s obligation It is an express contract between the third party and the creditor With a guarantee arrangement the guarantor third person making the guaranty is secondarily liable a The guarantor can be required to pay the obligation only after the principal debtor defaults and usually only after the creditor has made an attempt to collect from the debtor b Under the Statute of Frauds a guaranty contract between the guarantor and the creditor must be in writing to be enforceable unless the main purpose exception applies if the main purpose of the guaranty agreement is to benefit the guarantor then the contract need not be in writing to be enforceable The same actions will release a surety or a guarantor from an obligation Making any material modification to the terms of the original contract without the surety s consent will discharge the surety s obligation If a creditor surrenders the collateral to the debtor or impairs the collateral without the surety s consent these acts can reduce the obligation of the surety Naturally any payment of the principal obligation by the debtor or by another person on the debtor s behalf will discharge the surety from the obligation The surety or guarantor can also assert any of the defenses available to the principle debtor to avoid liability on the obligation to the creditor a Incapacity and bankruptcy are personal defenses which can be asserted only by the person who is affected b The surety cannot assert the statute of limitations as a defense c If the creditor fraudulently induced the person to act as a surety on the debt the surety can assert fraud as a defense When the surety or guarantor pays the debt owed to the creditor they acquire certain rights a The surety has the legal right of subrogation which means that any right that the creditor had against the debtor now becomes the right of the surety b The surety as a right of reimbursement from the debtor where they are entitled to receive from the debtor all outlays made on behalf of the Suretyship arrangement c Two or more sureties are called cosureties The right of contribution is when a cosurety pays more than their proportionate share on a debtor s default and is entitled to recover from the other cosureties the amount paid above that surety s obligation 4 Protection for Debtors A The law protects debtors as well as creditors Certain types of real and personal property are exempt from execution or attachment Chapter 16 Creditor Debtor Relations and Bankruptcy B The most familiar exemption is the homestead exemption in which each state permits the debtor to retain the family home The purpose of this is to ensure that the debtor will retain some form of shelter 5 Bankruptcy Law A Bankruptcy law has two goals to protect a debtor by giving them a fresh start D free from creditor s claims and to ensure equitable treatment to creditors who are competing for the debtor s assets Bankruptcy proceedings are held in federal bankruptcy courts which are under the authority of US district courts The bankruptcy court holds the proceedings required to administer the estate of the debtor in bankruptcy The most important types of relief are liquidation selling nonexempt assets and distribution of proceeds to debtor s creditors reorganizations and adjustment of debts by persons with regular incomes A consumerdebtor is a debtor whose debts result primarily from the purchase of goods for personal family or household use 6 Liquidation Proceedings A A debtor in a liquidation bankruptcy turns all assets over to a bankruptcy trustee a person appointed by the court to manage the debtor s funds The trustee sells the nonexempt assets and distributes the proceeds to creditors With certain exceptions the remaining debts are then discharged and the debtor is relieved of the obligation to pay the debts To bring a voluntary petition in bankruptcy the debtor files official forms designated for that purpose in the bankruptcy court The law now requires that before debtors can file a petition they must receive credit counseling from an approved nonprofit agency within the 180day period preceding the date of filing a The voluntary petition must contain 8 schedules The official forms must be completed accurately sworn to under oath and signed by the debtor b A debtor may be required to file a tax return at the end of each tax year while the case is pending and to provide a copy to the court This may be done at the request of the court or of the US trustee a government official who performs administrative tasks that a bankruptcy judge would otherwise have to perform 0 A bankruptcy court could dismiss a petition for relief if it would constitute a substantial abuse of bankruptcy law The law provides a means test to determine a debtor s eligibility i A debtor wishing to file for bankruptcy must complete the means test to determine whether they qualify ii If the debtor s income is above the median income then further calculations must be made to determine whether the person will have sufficient disposable income in the future to repay at least some of their unsecured debts Chapter 16 Creditor Debtor Relations and Bankruptcy iii Once future disposable income has been estimated that amount is used to determine whether the debtor will have income that could be applied to unsecured debts d A court can dismiss a petition for relief in two other situations if the debtor has been convicted for a violent crime or a drugtrafficked offense the victim can file a motion to dismiss the voluntary petition or if the debtor fails to pay postpetition domesticsupport obligations the court may dismiss the debtor s petition e If the voluntary petition for bankruptcy is found to be more proper the filing of the petition will itself constitute an order for relief a court s grant assistance to a petitioner C An involuntary bankruptcy occurs when the debtor s creditors force the debtor into bankruptcy proceedings It should not be used as an everyday debt collecting device and the Code provides penalties for the filing of frivolous petitions against debtors a For an involuntary action to be filed the debtors must have twelve or more creditors with three or more of those having unsecured claims totaling at least 15325 joining the petition or if they have fewer than twelve creditors one or more of the credits must have a claim totaling 15325 or more b If the debtor challenges the involuntary petition a hearing will be held and the bankruptcy court will enter an order for relief if it finds that either the debtor is not paying debts as they come due or a general receiver assignee or custodian took possession of or was appointed to take charge of substantially all of the debtor s property within 120 days before the filing of the petition D The moment a petition either voluntary or involuntary is filed an automatic stay or suspension of all actions by creditors against the debtor or the debtor s property normally goes into effect a The adequate protection doctrine protects secured creditors from losing their security as a result of the automatic stay The bankruptcy court can provide adequate protection by requiring the debtor or trustee to make periodic cash payments or a onetime cash payment b The code provides exceptions to the automatic stay collection efforts can continue for domesticsupport obligations proceedings against the debtor related to divorce child custody or visitation domestic violence and support enforcement are not stayed investigations by a securities regulatory agency can continue and certain statutory liens for property taxes are not stayed c A secured creditor or other party in interest can petition the bankruptcy court for relief from the automatic stay d The automatic stay on secured property terminates 45 days after the creditors meeting They stay terminates unless the debtor redeems or reaffirms certain debts Chapter 16 Creditor Debtor Relations and Bankruptcy e If the debtor had two or more bankruptcy petition dismissed during the prior year the Code presumes bad faith E On the commencement of a liquidation proceeding an estate in bankruptcy is created The estate consists of all the debtor s interests in property currently held wherever located This includes community property property transferred in a transaction voidable by the trustee and proceeds and profits form the property of the estate F Promptly after the order for relief in the liquidation proceeding has been entered a trustee is appointed The basic duty of the trustee is to collect the debtor s available estate and reduce it to cash for distribution preserving the interests of both the debtor and the unsecured creditors a The trustee is required to promptly review all materials filed by the debtor to determine if there is substantial abuse When there is a presumption of abuse the trustee must either file a motion to dismiss the petition or file a statement explaining why a motion would not be appropriate b The trustee has the power to require persons holding the debtor s property at the time the petition is filed to deliver the property to the trustee The trustee has specific powers of avoidance which enable the trustee to set aside a sale or other transfer of the debtor s property and take the property back for the debtor s estate c A trustee steps into the shoes of the debtor therefore any reason that a debtor can use to obtain the return of their property can be used by the trustee as well d A debtor is not permitted to transfer property or to make a payment that favors or gives a preference to one creditor over others If a preferred creditor one who has received a preferential transfer from the debtor has sold the property to an innocent third party the trustee cannot recover the property from the innocent party i Sometimes the creditor receiving the preference is an insider an individual partner partnership corporation or officer or director of a corporation who has a close relationship with the debtor ii Not all transfers are preferences To be a preference the transfer must be made for something other than current consideration e The trustee may avoid fraudulent transfers or obligations if they were made within two years prior to the filing of the petition or were made with actual intent to hinder delay or defraud a creditor Transfers made for less than reasonably equivalent consideration are also vulnerable if the debtor became insolvent or was left engaged in business with an unreasonably small amount of capital G The trustee takes control of the debtor s property in a bankruptcy but an individual debtor is entitled to exempt certain property from the bankruptcy Chapter 16 Creditor Debtor Relations and Bankruptcy according to the Bankruptcy Code Individual states have the power to pass legislation precluding debtors from using the federal exemptions within the state H The Bankruptcy Code limits the amount of equity that can be claimed under the homestead exemption It is also only available if the debtor has lived in a state for two years before filing the bankruptcy petition 1 Within a reasonable time after the order for relief has been granted the trustee must call a meeting of the creditors listed in the schedules filed by the debtor The debtor is required to attend and to submit to examination under oath by the creditors and the trustee J To be entitled to receive a portion of the debtor s estate each creditor normally files a proof of claim with the bankruptcy court clerk within ninety days of the creditors meeting When the debtor has no assets called a no assets case creditors are notified of the debtor s petition for bankruptcy but are instructed not to file a claim K The Code provides specific rules for the distribution of the debtor s property to secured and unsecured creditors If any amount remains after the priority classes of creditors have been satisfied it is turned over to the debtor a The Code requires that consumerdebtors file a statement of intention with respect to the secured collateral They can choose to pay off the debt and redeem the collateral claim it is exempt reaffirm the debt and continue making payments or surrender the property to the secured party b Bankruptcy law establishes an order of priority for classes of debt owed to unsecured creditors and they are paid in the order of their priority If there are insufficient proceeds to pay fully all the creditors in a class the proceeds are distributed proportionately to the creditors in that class and classes lower in priority receive nothing L The primary purpose of liquidation is to obtain a fresh start through a discharge of debts but certain debts are not dischargeable in bankruptcy a There are 15 claims that are not dischargeable in bankruptcy b In addition to the exceptions to discharge a bankruptcy court may also deny the discharge based on the debtor s conduct When a discharge is denied the debtor s assets are still distributed to the creditors c The primary effect of a discharge is to void or set aside any judgment on a discharged debt and prohibit any action to collect a discharged debt d A discharge may be revoked within one year if it discovered that the debtor acted fraudulently or dishonestly during the bankruptcy proceeding M An agreement to pay a debt dischargeable in bankruptcy is called a reaffirmation agreement A debtor may wish to pay a debt even though the debt could be discharged in bankruptcy Chapter 16 Creditor Debtor Relations and Bankruptcy a To be enforceable reaffirmation agreements must be made before the debtor is granted a discharge The agreement must be signed and filed with the court Court approval is required unless the debtor represented by an attorney during the negotiation of the reaffirmation and submits the proper documents and certifications b To discourage creditors from engaging in abusive reaffirmation practices the law provides specific language for disclosures that must be given to debtors entering into reaffirmation agreements A reaffirmation agreement that is not accompanied by the original signed disclosures will not be effective 7 Reorganizations A The type of bankruptcy proceeding most commonly used by corporate debtors is reorganization In a reorganization the creditors and the debtor formulate a plan under which the debtor pays a portion of the debts and is discharged of the remainder The same principles that govern the filing a liquidation petition apply to reorganization proceedings it can be brought either voluntarily or involuntarily To avoid bankruptcy proceedings creditors may prefer private negotiated adjustments of creditordebtor relations also known as workouts They are often must more exible and thus more conductive to a speedy settlement Once a petition for bankruptcy has been filed a bankruptcy court after notice and a hearing can dismiss or suspend all proceedings at any time if dismissal or suspension would better serve the interest of the creditors On entry of the order for relief the debtor generally continues to operate the business as a debtor in possession DIP The DIP s role is similar to that of a trustee in liquidation As soon as practicable after the entry of the order for relief a creditors committee of unsecured creditors is appointed The committee is often composed of the biggest suppliers to the business A reorganization plan to rehabilitate the debtor is a plan to conserve and administer the debtor s assets in the hope of an eventual return to successful operation and solvency The plan must be fair and equitable and designate classes of claims and interests specify the treatment to be afforded to the classes of creditors provide an adequate means for the plan s execution and provide for payment of tax claims over a fiveyear period a Only the debtor may file a plan within the first 120 days after the date of the order for relief If the debtor does not meet the 120day deadline or obtain an extension and if the debtor fails to procure the required creditor consent within 180 days any party may propose a plan b Once the plan has been developed it is submitted to each class of creditors for acceptance For the plan to be adopted each class must accept it The plan need not provide for full repayment to unsecured creditors Chapter 16 Creditor Debtor Relations and Bankruptcy c Confirmation is conditioned on the debtor s certifying that all post petition domesticsupport obligations have been paid in full The plan can be modified on the request of the debtor the DIP the trustee the US trustee or a holder of an unsecured claim A cramdown provision is when a court confirms the plan over the objections of a class of creditors d The plan is binding on confirmation Confirmation of a plan does not discharge an individual debtor For individual debtors the plan must be completed before discharge will be granted unless the court orders otherwise 8 Bankruptcy Relief Under Chapter 13 and Chapter 12 A The Code also provides for individuals repayment plans and familyfarmer B and familyfisherman debt adjustments The Bankruptcy Code provides for Adjustment of Debts of an Individual with Regular Income in which individuals with regular income who owe fixed unsecured debts within a certain range may take advantage of bankruptcy repayment plans a A Chapter 13 repayment plan can be initiated only by the debtor s filing of a voluntary petition or by court conversion of a Chapter 7 petition Certain liquidation and reorganization cases may be converted to repayment plan cases with the consent of the debtor b The Bankruptcy Code imposes the requirement of good faith on a debtor at both the time of the filing of the petition and the time of the filing of the plan The Code does not define good faith but if the circumstances on the whole indicate bad faith a court can dismiss a debtor s Chapter 13 petition c A plan of rehabilitation by repayment must provide for the turning over to the trustee of such future earnings or income of the debtor as is necessary for execution of the plan full payment through deferred cash payments of all claims entitled to priority such as taxes and identical treatment of all claims within a particular class The repayment plan may provide either for payment of all obligations in full or for payment of a lesser amount i The length of the payment plan can be three or five years depending on the debtor s family income ii After the plan is filed the court holds a confirmation hearing at which interested parties may object to the plan The court will confirm a plan with respect to each claim of a secured creditor under any of the following circumstances if the secured creditors have accepted the plan if the plan provides that secured creditors retain their liens until there is payment in full or until the debtor receives a discharge or if the debtor surrenders the property securing the claims to the creditors Chapter 16 Creditor Debtor Relations and Bankruptcy C To help relieve economic pressure on small farmers Congress created Chapter 12 of the Bankruptcy Code Congress extended this protection to family fishermen modified its provisions somewhat and made it a permanent chapter in the Bankruptcy Code a A family farmer is one Whose gross income is at least 50 percent farm dependent and Whose debts are at least 50 percent farm related A family fisherman is defined as one Whose gross income is at least 50 percent dependent on commercial fishing operations and Whose debts are at least 80 percent related to commercial fishing b The procedure for filing a familyfarmer or familyfisherman bankruptcy plan is very similar to the procedure for filing a repayment plan under Chapter 13 A farmer or fisherman Who has already filed a reorganization or repayment plan may convert it to a Chapter 12 plan and from a Chapter 12 plan to a liquidation plan 0 The content of a plan under Chapter 12 is basically the same as that of a Chapter 13 repayment plan Generally the plan must be confirmed or denied Within 45 days of filing For unsecured debtors the plan must be confirmed if either the value of the property to be distributed under the plan equals the amount of the claim or the plan provides that all debtor s disposable income to be received in a threeyear period Will be applied to making payments 10


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