Law Ch.

14 Study Guide

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Negotiable Instruments The primary benefit is that it can be a substitute for money. There are 4 kinds of negotiable instruments: o Drafts, Checks, Promissory Notes, CDs An ordinary check is an order to pay The checking account holder who writes a check is the drawer, the bank upon which the check is drawn is the drawee, and the part to whom the check is written is the payee. There are three types of checks: o Personal- An ordinary check that has a chance to bounce. o Certified- The bank sets aside money from the drawers bank account to later pay the certified check when it is presented for payment. The check is certified when the bank writes or stamps the word certified across the face of an ordinary check. o Cashiers- Purchase from a bank by paying the bank the amount of the check plus a fee for issuing the check. The purchaser does not have to have a checking account at the bank. (noncancellable negotiable instrument) A promissory note is an unconditional written promise by one party to pay money to another party. Promissory notes arise when one party borrows money from another. o The extension of credit o The borrowers promise to repay the debt A CD is a special form of note that is created when a depositor deposits money at a financial institution in exchange for the

institutions promise to pay back the amount of deposit plus an agreed-upon rate of interest upon the expiration date. Creating a Negotiable Instrument 1. Be in writing 2. Be signed by the maker or the drawer 3. Be an unconditional promise or order to pay 4. State a fixed amount of money 5. Not require any undertaking in addition to the payment of money

6. Be payable on demand or at a definite time 7. Be payable to order or to bearer Negotiation is the transfer of a negotiable instrument by a person other than the issuer. The person who transfers the instrument is the transferor. The person to whom the instrument is transferred is the transferee, who becomes the holder Order Paper- An instrument that is payable to a specific payee or indorsed to a specific indorsee. Holder in Due Course (Review Examples on pg. 329, 331) A holder who takes an instrument for value, in good faith, and without notice that it is defective or overdue. HDC Requirements: 1. Taken for value 2. Taken in good faith 3. Taken without notice that it is overdue, dishonored, or encumbered in anyway 4. Bearing no apparent evidence of forgery, alterations, or irregularities. Real defenses for HDC o Minority o Extreme Duress o Mental Incapacity o Illegality o Discharge in Bankruptcy o Fraud in the Inception o Forgery o Material Alteration

Law Ch. 15 Study Guide

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Secured Credit To minimize the risk associated with extending unsecured credit, a creditor may require a security interest in the debtors collateral. The collateral secures the payment of the loan. Security interests may be taken in real, personal, intangible, and other property If the debtor fails to make the payments when due, the collateral may be repossessed to recover the outstanding amount. Mortgage Is an instrument that represents a security interest in real property Mortgagor- The owner-debtor who pledges his or her real property as security for a loan. Mortgagee- The creditor who holds a security interest in the ownerdebtors real property Secured Transactions When a creditor extends credit to a debtor and takes a security interest in some personal property of the debtor Revised Article 9 of the UCC o Governs secured transactions in personal property o Governs attachment and perfection A security interest may be given in various types of personal property, including: o Goods (equipment, inventory, and fixtures) o Instruments (checks, notes, stocks, and bonds) o Accounts (accounts receivable) o General Intangibles (patents, copyrights, and trademarks) o Other personal property (Review Case 15.1 on page 348) What can be done by a creditor to protect themselves from debtor bankruptcy? Security? FITFIR-First In Time, First In Right The creditor who files first, has first right to the assets All collection activity stops as soon as the debtor files for bankruptcy. Types of Security

Surety Arrangement o A third partyknown as the surety, or co-debtorpromises to be liable for the payment of another persons debt. o Commonly referred to as a co-signer o Jointly and Severally liable o The creditor does not have to go after the primary debtor before seeking payment from the co-debtor (Review Case 15.2 on page 351) Guaranty Arrangement o A third party (guarantor) agrees to pay the debt of the principal debtor if the debtor defaults and does not pay the debt when it is due. o The guarantor is secondarily liable on the debt o The guarantor is obligated to pay the debt only if the principal debtor defaults and the creditor has attempted unsuccessfully to collect the debt Collateral o Take property to collateralize your debt, property to take if the debtor defaults Personal- Attachment and Perfection Attachment- Security agreement between the creditor and debtor Debtor agrees certain property will be security for creditor Perfection- Filing a financial statement (creditor) Filed in county clerks office in county doing business If debtor is doing business in multiple

counties, file your financing statement in multiple counties and with the state. Real- Mortgage (forms of security) Intellectual- Patent, Trademark, and Copyright Bankruptcy (Types) Is a Federal law, with no state bankruptcy laws Chapter 7 Bankruptcy (Straight or Liquidation) o Sell all business assets for cash

o Cash is distributed to creditors (usually 1 cent on the dollar) o Any unpaid debts are discharged-cant come a sue you o Can only be filed every 7 years Chapter 7 Procedures o Commenced when a petition is filed with the bankruptcy court o Filed by either the debtor (voluntarily) or by creditors (involuntarily) o A trustee must be appointed; becomes the legal representative of the bankruptcy debtors estate NY State Exemptions o o o o o o 1 TV, 1 Computer, 1 Cell Phone Wedding Ring, Watch, Jewelry up to $1000 1 vehicle up to $4000 in value Food for up to 128 days Retirement plans and Child support Homestead Exemption-$75,000 upstate & $150,000 downstate: $300,000 Cost of House ($150,000) Mortgage Paid

$150,000 Remaining Balance ($75,000) Exemption to debtor to start new life $75,000 To the bank (Review Case 15.3 on page 355) Nondischargeable Debts o Claims for taxes accrued within three years prior to the filing of the petition of bankruptcy o Fines and penalties payable to federal, state, and local governments o Alimony, maintenance, and child support (Review Case 15.1 on page 357) Chapter 11 Reorganization Bankruptcy o Is often in the best interest of debtors and creditors o Majority are filed by corporations o The debtor is left in place to operate the business during the reorganization proceeding, making them the debtor-inpossession

o The court may appoint a trustee to operate the debtors business only upon a showing of cause, such as fraud, dishonesty, or gross mismanagement o Develop a work out plan that creditors agree to Lasts 3-5 years o Elongate payment plans (5-7 years) o Changing terms of the loan o I could choose chapter 7 and you get nothing, or let me choose chapter 11 and we can work together (Review Kmart Case on page 359) Chapter 13 Consumer Debt Adjustment o Debtor Advantages: Avoiding the stigma of chapter 7 liquidation Retaining more property that is exempt under ch. 7 Incurring less expense than in a ch. 7 proceeding o Creditor Advantages: Recover a greater percentage of the debts owed to them than they would under ch. 7 Banks like it because at least they are getting something back in return o Initiated only by the voluntarily filing of a petition by a debtor Must allege he is (1) Insolvent or (2) unable to pay his debts when they become due Only an individual with regular income who owes individually noncontingent, liquidated, unsecured debts or less than $250,000 and secured debts of $750,000 may file o For individuals, A wage owners plan o Cant file ch. 7 first, must try a ch. 13, then after 5 years can file for ch. 7

Law Ch. 16 Study Guide

2/11/2013 12:04:00 PM

Sole Proprietorship The owner is the business, with no separate legal entity Most common form of business organization in the US Many small businesses operate this way Major Advantages o It is easy and costs little to form o The owner has a right to make all management decisions concerning the business, including those involving hiring and firing employees o Right to receive all of the businesss profits o Can be easily transferred or sold if and when the owner desires to do so; no other approval is necessary Important Disadvantages o Access to capital is limited to personal funds plus any loans he or she can obtain o Incur all expenses o Legally responsible for the businesss contracts and the torts he/she or any of the employees commit in the course of employment Operating under a trade name is commonly referred to d.b.a (doing business as) o Must be filed in the county clerks office Must file a certificate of trade name o Name and address of applicant o The trade name o Address of the business PERSONALLY LIABLE-creditors may recover claims against the business from the sole proprietors personal assets.

(Review Case 16.1 on page 372) Partnership A voluntary association of 2 or more persons for carrying on a business as co-owners for profit. Creates certain rights and duties among partners, established in the partnership agreement and by law Are personally liable for the debts and obligations of the partnership To qualify as a partnership

o It must be (1) an association of two or more persons (2) carrying on a business (3) as co-owners (4) for profit Business Certificate d.b.a. with the county clerks office Advantage: o Shared expenses Disadvantage: o All partners are jointly and severally liable A partnership agreement or articles of partnership must be orally, written, or implied from the conduct of parties All partners have equal rights in the management and conduct of the partnership business Partners are not permitted to sue the partnership or other partners at law. o Instead they are given the right to bring an action for an accounting against other partners. Tort Liability o A partner or employee of the partnership may commit a tort that causes injury to a third person, that could be caused by a negligent act, breach of trust, breach or fiduciary duty,

defamation, fraud, or another intentional tort. o The partnership is liable if the act is committed while the person is acting within the ordinary course of partnership business. (Review Case 16.2 on page 376) Limited Liability Partnership & Limited Liability Company Can lose only their capital contributions should the partnership fail All profits and losses are reported on the individual partners income tax return Taxed like sole proprietorship or partnership The owners can manage the business Have limited liability Created by filing articles of organization with department of the state o Name, Type of business, Managing member No joint liability- only person who commits malpractice is responsible

Must run an ad in some local newspaper (once a week for 4 weeks) LLCs are treated as artificial persons that can sue or be sued, enter into and enforce contracts, hold title to and transfer property, and be found civilly and criminally liable for violations of law (Review Case 16.3 on page 384) Common Law Contract Distributions Name of business Location Define the type of business Capitalization Management (expertise, duty) Accounting (fiscal year or calendar year) Confidentiality of business (rules when leaving) Death Right of 1st refusal

Law Ch. 17 Study Guide

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Corporations Is a separate legal entity, treated as artificial persons created by the state who can sue or be sued in their own names, enter into and enforce contracts, hold title to and transfer property, and be found civilly and criminally liable for violations of law Unique Characteristics o Limited liability of shareholders o Free transferability of shares o Perpetual existence o Centralized management File a Certificate of Incorporation with the department of state o Name or corporation o Number of shares issued o Address of the main office o Name and address of each incorporator Corporation is responsible not the partners Extremely costly Have an Organizational Meeting o Adopt the bylaws

o Elect corporate officers o Transact such other business as may come before the meeting (Review Case 17.1 on page 401 and 17.2 on page 414) Subchapter S Profits pass through shareholders directly Not taxed like a corporation Sarbanes-Oxley Act of 2002 Major provisions: o CEO and CFO certification o Reimbursement of bonuses and incentive pay o Prohibition on personal loans o Tampering with evidence o Bar from acting as the officer or a director

Law Ch. 18 Study Guide

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The SEC Created in 1934 and empowered it to administer federal securities law Major Responsibilities: o Adopting rules that further the purpose of the federal securities statutes o Investigating alleged securities violations and bringing enforcement actions against the suspected violators. o Regulating the activities of securities brokers and advisors. Securities are defined as: Common stock, Preferred stock, Bonds, Debentures, and Warrants Preorganization subscription agreements, Interest is oil gas & mineral rights, deposit receipts for foreign securities Investment contracts (Review Case 18.1 on page 433) Section 10(b) and Rule 10b-5 Section 10(b) prohibits the use of manipulative and deceptive devices in contravention of the rules and regulations prescribed by the SEC Prohibits trading based on inside information o Martha Stewart for example Rule 10b-5 provides that: o It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange, To employ an device, scheme, or artifice to defraud Make any untrue statement of a material fact or to omit

to state material face To engage in any act, practice, or course of business that operates or would operate as a fraud. o All transfers of securities, whether made on a stock exchange, in the over-the-counter market, in a private sale, or in connection with a merger, are subject to this rule. (Review Case 18.2 on page 443)

Law Ch. 21 Study Guide

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Resale Price Maintenance Occurs when a party at one level of distribution enters into an agreement with a party at another level to adhere to a price schedule that either sets or stabilizes prices Setting minimum resale prices is a per se violation of Section 1 of the Sherman Act as an unreasonable restraint to trade (Review Case 21.1 on page 512) (Review Microsoft Case on page 515) Section 5 of the FTC Act In 1914, Congress enacted the FTC Act and created the FTC. Section 5 prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce Covers conduct that: o Violates any provision of the Sherman Act or the Clayton Act o Violates the spirit of those acts o Fills the gaps of those gaps o Offends public policy, or is immoral, oppressive, unscrupulous, or unethical National Grid Utilities are OK as monopolies- if more than once company, wires would be everywhere and a mess. Must get permission to raise prices from a regulatory body (Review Maurice Clarett case on page 523)

Law Ch. 24 Study Guide

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(Review Case 24.1 on page 587) Estray Statutes Permit a finder of mislaid or lost property to clear title to property if: o The finder reports the found property to the appropriate government agency and then turns over possession of the property to this agency o Either the finder or the government agency posts notices and publishes advertisements describing the lost property o A specified time passes without the rightful owners reclaiming the property. (Review Case 24.2 on page 589) Section 2401-Title passes depending on the shipping contract Destination- passes once delivered Shipping- once shipped Bailments Occurs when the owner of personal property delivers his property to another person either to be held, stored, or delivered or for some other purpose. o Mutual benefit bailment The owner of the property is the bailor The safe keeper is the bailee A bailment is different from a sale or a gift because title to the goods does not transfer to the bailee o The bailee must follow the bailors directions concerning the goods Elements to create a bailment: o Personal property

o Delivery of possession o Bailment agreement (Review Case 24.3 on page 591) Gratuitous Bailment (read examples on page 592) Bailee goes to neighbor to borrow lawn mower Must take extraordinary care of property Leave pet at home, only have to walk and feed it Insurable Interest for Personal Property (UCC section 2501)

At the making of the contract, the buyer has an insurable interest. He can go to insurance company and insure that property even though he doesnt own it yet. Section 2509 Risk of Loss Passes the same way as the shipping contract agreed upon does Subrogated- Insurance company will take place of buyer, and can sue for negligence o If truck went off the road on the way to deliver goods Types of Insurance (Exhibit 24.2 on page 596) Umbrella Insurance Pays only when the basic policy limits of other insurance have been exceeded Flood Insurance Not covered in homeowners insurance Only place to buy coverage is from the National Flood Insurance Program NFIP o $250,000 for home and $750,000 for business Misrepresentation and Concealment Insurance companies may require applicants to disclose certain information to help them determine whether they will insure the risk and to calculate the premium. The insurer may avoid liability on the policy: o Its decision is based on material misrepresentation on the part of the applicant o The applicant concealed material information from the insurer (Review Case 24.4 on page 599)