Name: ____________________Keith LeBlanc________________________
Week 8 Study Guide: Chapters 17, 15, &
16
Instructor’s Note: Please utilize and complete this study guide as you read these chapters. The
questions are listed in the order in which the material appears in the chapters. You can type your
answers directly into this Study Guide or type them into a separate Word document. If you would
prefer to handwrite it, you may handwrite it and scan and email your handwritten answers to me.
Once you have completed it, I would encourage you to use it when completing weekly Quiz that
covers the week’s material! This Study Guide appears lengthy; however, please note that over 1
page of the content consists of explanations and introductions that I have provided about
the course material. Additionally, please email me a copy of your Week 8 Study Guide and
complete the weekly Quiz by 11:59PM on Sunday, July 19, 2015 at 11:59PM. The subject line
of your email MUST read “Your Name – Business Law – Week 8 Study Guide”. This week’s
Study Guide will be worth 40 points.
Chapter 17 – Agency Relationships In Business
This chapter discusses the different types of relationships that can potentially be created between
employers and those who do work for them. This chapter will be of particular interest to anyone
who is an entrepreneur or who is an aspiring entrepreneur because the information in this chapter
may affect the way in which you classify, hire, and manage your staff. Additionally, this chapter will
be of particular interest to those who are pursuing new types of employment in the future.
When someone enters into a contractual relationship with an employer; essentially, two general types
of relationships can potentially be created:
1.) Employer and employee
2.) Employer and independent contractor
The textbook will contain more formal definitions of these terms, but for the purposes of providing
you with a brief introduction, you may consider an employee to be someone who is under the
control of the employer and someone over whom the employer has a great deal of control and
supervision with regards to work and the way in which work is done. An independent contractor can
be viewed as someone who has a great deal of freedom in determining how their work is done and
when it is done.
Understanding the details of each type of relationship as well as the differences between the types of
relationships is crucial. As you will see in the text, employers have significant financial and legal
incentives to classify someone as an independent contractor. Needless to say, many employers prefer
to hire new staff under the status of independent contractors rather than employees. The text will
also show you that there are advantages and disadvantages of being treated as an independent
contractor.
1
Please be sure to understand the concept of agency (which is discussed at the start of the text)
before moving forward. Essentially, in an agency relationship, one party (the agent) agrees to
represent and advocate for the best interests of another party (called the principal). An example of
an agency relationship exists in the world of professional sports. Professional athletes hire sports
agents to negotiate the best possible contract on their behalf. Some agents are very successful at
obtaining lucrative contracts for the players whom they represent and for whom they advocate. For
example, Drew Rosenhaus (a powerful sports agent) was able to successfully advocate on behalf of
Willis McGahee in the 2003 NFL Draft. Willis headed into the draft with a major knee injury that
left him nearly unable to walk. However, Drew’s successful advocacy and strategic maneuvering
managed to get Willis drafted in the first round of the 2003 NFL Draft. This meant that Willis
earned many more millions of dollars than he would have earned if he had been drafted later. In
contrast, athletes often terminate their relationships with agents who fail to land them lucrative
contracts. For example, Geno Smith fired his agent after he was not drafted in the first round of the
2013 NFL Draft and he wound up earning far less money than he would have earned if he had been
drafted in the first round. Geno had been projected to be a first-round draft pick, but fell to a later
round because teams were concerned about his athletic ability and character. Because his agent did
not dispel these concerns, Geno fired him.
Please explain the concept of agency:
Two parties – the agent and the principal – have a relationship in which the former is
authorized to act in certain matters on behalf of, and beneficial to, the latter. The principal
controls the actions of the agent.
How does the Restatement (Third) of Agency define agency?
Section 1(1) of the Restatement (Third) of Agency defines agency as “the fiduciary relation
which results from the manifestation of consent by one person to another that the other
shall act in his [or her] behalf and subject to his [or her] control, and consent by the
other so to act.”
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
489). Cengage Textbook. Kindle Edition.
What is a fiduciary?
The term takes in both the role of a person with duties to another with respect to financial
matters, and describes a relationship between parties that is based on trust and confidence.
What is an independent contractor?
An independent contractor is a person who contracts with another to do something for him
[or her] but who is not controlled by the other or subject to the other’s right to control with
respect to his [or her] physical conduct in the performance of the undertaking. He [or she]
may or may not be an agent.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
489). Cengage Textbook. Kindle Edition.
Why are independent contractors not employees?
Their activities are performed and scheduled with no specific control from the client
receiving the services.
2
TRUE or FALSE: Every employer\independent contractor relationship also creates an agency
relationship.
False. Circumstances dictate; there may or may not be an agency created dependent on the
roles of the parties in the relationship. If the independent contractor only delivers services
it will not usually involve agency; if the contractor is also representing the other party in a
fiduciary sense it will add agency to the relationship.
Please list at least five questions that courts ask when determining whether someone is an employee
or independent contractor:
=
How much control can the employer exercise over the details of the work? (If an
employer can exercise considerable control over the details of the work, this would
indicate employee status. This is perhaps the most important factor weighed by the
courts in determining employee status.)
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Is the worker engaged in an occupation or business distinct from that of the
employer? (If so, this points to independent-contractor status, not employee status.)
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Is the work usually done under the employer’s direction or by a specialist without
supervision? (If the work is usually done under the employer’s direction, this would indicate
employee status.)
=
Does the employer supply the tools at the place of work? (If so, this would indicate
employee status.)
=
For how long is the person employed? (If the person is employed for a long period of
time, this would indicate employee status.)
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
490). Cengage Textbook. Kindle Edition.
TRUE or FALSE: Federal employment discrimination laws apply to both employees and
independent contractors.
False. Independent contractors are not covered by applicable federal laws related to
discrimination.
Why would a business want to claim that someone is an independent contractor and not an
employee?
There are tax issues (FICA and others) that are avoided with independents and there is
some shelter from liability claims for actions by the indenendent.
Is an employer liable for the actions of an independent contractor with whom the employer
contracts?
If the relationship can be proven a true client-independent agreement, the employer is
generally not liable for employee actions.
What criteria does the IRS use when determining whether a worker is an independent contractor or
an employee?
IRS tends to closely examine the “control” that the client business exercises over the
worker. Close control as to workplace, hours, pay, and performance tend to have IRS rule
that a true employer-employee relationship does exist. Many other public agencies relying
on payroll-based tax collections are also eager to reclassify independents as employees.
3
Who owns the copyright when an employee creates a copyrighted work during the scope of their
employment?
The employer, based on the evidence of a “work to hire” status of the employee.
Who owns the copyright when an independent contractor creates a copyrighted work in the midst
of a contractual relationship with another party?
Typically employers using independents likely to develop copyright-value work will add a
“work for hire” element to the contract. This eliminates the independent’s rights to any
item copyrighted while working under this agreement.
TRUE or FALSE: All agency relationships must be in writing
False.
TRUE or FALSE: Consideration is required to establish an agency relationship.
False.
When will agency relationships be treated by a court as unenforceable?
Any agency created for undertaking or managing illegal activities is unenforceable. The
assassin retained as an agent of the mob boss to eliminate individuals would be so
classified.
What are the 4 ways in which an agency relationship can arise?
=
=
=
=
By agreement.
By estoppel.
By ratification.
By operation of law.
Please describe how an agency relationship can be created by agreement:
The relationship can be created verbally or in writing, but it requires the agent-principal to
be present. Implied agency can also be created through activities that are undertaken
between one party acting with permission for another.
Please describe how an agency relationship can be created by ratification:
Any contract created by a would-be agent for a principal prior to full agreement can be
enforced through ratification (principal agreement after the fact).
Please describe how an agency relationship can be created by estoppel:
If a third party is evidently convinced that principal XX is represented by supposed agent
YY (through principal’s representations) , then principal XX cannot later claim otherwise.
The principal is “estopped” from attempting to deny the agency.
Please describe how an agency relationship can be created by operation of law:
Agency can be created in situations where a person is acting for the general welfare of
“principals” which would include consumer purchases or decisions made for family
members. Agency can also be created in emergencies where moving outside the typical
definition is warranted.
4
TRUE or FALSE: Once a principal-agent relationship has been created, both parties have duties
that govern their conduct.
True.
What duty do parties in an agency relationship have towards each other?
Generally speaking, fiduciary duties that are based on trust and confidence.
What two types of law provide remedies when violations of the agency relationship occur?
Contract law (focusing on duty, performance) and tort law (focusing on injuries beyond the
contract law boundaries).
Please list the five duties that the agent owes to the principal:
Generally, the agent owes the principal five duties: (1) performance,
(2) notification, (3) loyalty, (4) obedience, and (5) accounting.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
495). Cengage Textbook. Kindle Edition.
With regards to performance, what is the implied condition in every agency relationship? What can
happen when an agent fails to perform their duties?
Every agency relationship is assumed to be founded on trust and confidence, and with a
direct fiduciary duty by agency to principal. When and if an agent seems to have not so
performed, a breach of contract suit is possible and if illegal acts or more injurious acts area
involved, tort liability can be claimed.
Please describe the details of the duty of performance:
The implied duties of the agent are those that would be classed as “reasonable” by objective
parties. All actions must be performed in a manner most beneficial to the principal.
Please describe the details of the duty of notification:
Agent must notify principal in a timely and full manner of every matter that is encountered
that has a bearing on the agency’s intentions.
Please describe the details of the duty of loyalty:
Agent actions must be solely beneficial to the principal, and actions by the agent must be
performed on behalf of the principal solely.
TRUE or FALSE: As long as the principal receives a significant benefit from an agent-principal
relationship, the agent is able to retain a small, secret profit for themselves.
False. The duty of loyalty calls for all benefits to accrue to the principal.
Please describe the details of the duty of obedience:
The agent must respond as quickly as is reasonable and in full response to a principal’s
requests or directions. Some flexibility is permitted in emergency or extraordinary
situations when the agent should act without absolute conformance.
Please describe the details of the duty of accounting:
5
The agent owes timely and accurate accounting for the handling of any funds during the
relationship. Agent and principal funds must not be co-mingled.
Please list the duties that the principal owes to the agent:
These duties relate to compensation, reimbursement and indemnification, cooperation, and
safe working conditions.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
496). Cengage Textbook. Kindle Edition.
Please describe the details of the duty of compensation:
The principal, with or without explicit payment agreements, owes the agent fair, timely and
prompt compensation for services.
Please describe the details of the duty of reimbursement and indemnification:
Reimbursement calls for principal repaying the agent for authorized expenses incurred on
principal’s behalf. Indemnification calls for protection of the agent from liability incurred
on the principal’s behalf (and through no fault of the agent).
Please describe the details of the duty of cooperation:
Principal must cooperate whenever agent requires assistance in completing action within
the agency relationship.
Please describe the details of the duty of safe working conditions:
Even though agency is not always within an employer-employee relationship, the principal
has the obligation to insure that working conditions are safe and free from potential future
problems.
What are the two ways in which an agent has authority to act?
The agent can gain actual (express, implied) authority through agreement or gain apparent
authority through actions and have it validated through ratification by principal after the
fact.
What are the two ways in which an agent has express authority? Please list them and describe them:
=
Through the “equal dignity” rule, which requires that if the agency contract is in
writing, then the agent’s authority must be in writing.
=
Through the very commonly used “power of attorney”.
What is Power of Attorney? What type of authority does it grant to an agent?
Power of Attorney confers express authority in narrow (special) or broad (general) areas to
act on behalf of another person, and is generally a written document. Common in health
decision planning for parents, spouses, etc. and in financial matters.
Please describe the concept of implied authority:
6
Implied authority can be drawn from duties. A person whose employment calls for
independent and varied decisions that are made for employer (as agent or not) may have
implied authority based on reasonable nature of duties on a consistent basis.
Please describe the concept of apparent authority:
This is the authority granted to the agent by words, documents, that to a third party infer
“apparent authority” with respect to situations. Related to the creation of agency through
estoppel.
What is ratification? Please list the requirements for ratification as well.
=
The agent must have acted on behalf of an identified principal who subsequently
ratifies the action.
=
The principal must know of all material facts involved in the transaction. If a
principal ratifies a contract without knowing all of the facts, the principal can rescind
(cancel) the contract.
=
The principal must affirm the agent’s act in its entirety.
=
The principal must have the legal capacity to authorize the transaction at the time
the agent engages in the act and at the time the principal ratifies. The third party must also
have the legal capacity to engage in the transaction.
=
The principal’s affirmation must occur before the third party withdraws from the
transaction.
=
The principal must observe the same formalities when approving the act done by the
agent as would have been required to authorize it initially.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page 501).
Cengage Textbook. Kindle Edition.
What is a disclosed principal?
In the environment of an agency contract with third parties, a disclosed principal is one
where the identity of the principal is provided to the third party.
What is a partially disclosed principal?
The actual identity of the principal is not known, but the third party involved knows that the
person executing is an agent of another (principal) party.
What is an undisclosed principal?
The principal’s identity is unknown but the fact that the contracting party is acting as an
agent is also unknown.
Can a disclosed or partially disclosed principal be liable to a third party for a contract made by their
agent? If so, in what circumstances?
Yes, if the agent is acting in conformance with the agency agreement and any subsequent
orders from the principal.
Can an undisclosed principal be liable to a third party for a contract made by their agent? If so, in
what circumstances?
Yes, as in the other two cases; authorized agent actions can confer liability to principal.
7
Can a principal be liable to a third party for unauthorized acts committed by their agent? If so, in
what circumstances?
Typically principal not liable for any unauthorized acts by agent.
When is a principal liable for harms or torts committed by an agent?
The principal can be liable depending on whether the agent has authority in the matter.
TRUE or FALSE: Principals can be held liable for torts committed by their agents when they
instruct the agents to commit them.
True.
Please describe when a principal can be held liable for an agent’s misrepresentation:
The principal can always be liable if the agent had authority to make such representations
and if the issues are within the purpose and intent of the agency relationship.
Please explain the concept of respondeat superior:
It places the blame for injurious actions within an agency relationship on the person of
complete authority – the principal. From the Latin – let the master respond.
What is vicarious liability?
Makes the employer jointly liable when an employee commits a tortious act (by the
employment association).
What are some factors used by courts to determine when an agent was acting within the scope of
their employment?
=
Whether the employee’s act was authorized by the employer.
=
The time, place, and purpose of the act.
=
Whether the act was one commonly performed by employees on behalf of their
employers.
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The extent to which the employer’s interest was advanced by the act.
=
The extent to which the private interests of the employee were involved.
=
Whether the employer furnished the means or instrumentality (for example, a truck
or a machine) by which the injury was inflicted.
=
Whether the employer had reason to know that the employee would do the act in
question and whether the employee had ever done it before.
=
Whether the act involved the commission of a serious crime.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
505). Cengage Textbook. Kindle Edition.
With regards to travel, when is travel considered to be part of an employee’s scope of employment?
Whenever it is required to meet the employee’s responsibilities.
When can an employer be held liable for an employee’s intentional torts?
An employer can be held jointly liable for the employee’s injurious actions if these emerged
due to and occurred during authorized employment conditions (security guards, be careful).
An employer who knows of an employee’s tendency to play rough but makes no
adjustments can also be charged.
8
Generally speaking, is an employer liable for an independent contractor’s torts? What are the
exceptions to this general rule?
Generally, the employer is not liable. The exceptions generally involve the independent’s
working for the employer within a dangerous environment , by employer direction, where
injury is commonplace (to other workers or non-involved persons).
Please list and briefly describe the five ways in which an agency relationship can be terminated:
=
Lapse of time. When an agency agreement specifies the time period during which t
time is stated, the agency continues for a reasonable time and can be terminated at will
by either party. What constitutes a “reasonable time” depends, of course, on the
circumstances and the nature of the agency relationship.
=
Purpose achieved. If an agent is employed to accomplish a particular objective, such
as the purchase of breeding stock for a cattle rancher, the agency automatically ends after
the cattle have been purchased. If more than one agent is employed to accomplish the
same purpose, such as the sale of real estate, the first agent to complete the sale
automatically terminates the agency relationship for all the others.
=
Occurrence of a specific event. When an agency relationship is to terminate on the
happening of a certain event, the agency automatically ends when the event occurs. If
Posner appoints Rubik to handle her business affairs while she is away, the agency
terminates when Posner returns.
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Mutual agreement. The parties to an agency can cancel (rescind) their contract by
mutually agreeing to terminate the agency relationship, even if it is for a specific duration.
=
Termination by one party. As a general rule, either party can terminate the agency
relationship (the act of termination is called revocation if done by the principal and
renunciation if done by the agent). Although both parties have the power to terminate the
agency, they may not possess the right.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
507). Cengage Textbook. Kindle Edition.
What liability can be imposed when wrongful termination occurs?
Damages claimed for breach of contract.
What duty does the principal have when an agency relationship is terminated?
All third parties who have done business via the agency or have been informed of the agency
and it’s purposes must be notified that the relationship is terminated.
Please list and briefly describe the ways in which an agency relationship can be terminated by
operation of law:
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Death or insanity. The general rule is that the death or mental incompetence of
either the principal or the agent automatically and immediately terminates an ordinary
agency relationship. Knowledge of the death is not required. Geer sends Tyron
to China to purchase a rare painting. Before Tyron makes the purchase, Geer dies. Tyron’s
agent status is terminated at the moment of Geer’s death, even Miller though Tyron does
not know that Geer has died. Some states, however, have enacted statutes changing this
common law rule to make knowledge of the principal’s death a requirement for agency
termination.
9
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Impossibility. When the specific subject matter of an agency is destroyed or lost, the
agency terminates. Bullard employs Gonzalez to sell Bullard’s house, but before
any sale, the house is destroyed by fire. In this situation, Gonzalez’s agency and authority
to sell Bullard’s house terminate. Similarly, when it is impossible for the agent to perform
the agency lawfully because of a change in the law, the agency terminates.
=
Changed circumstances. When an event occurs that has such an unusual effect on
the subject matter of the agency that the agent can reasonably infer that the principal will
not want the agency to continue, the agency terminates. Roberts hires
Mullen to sell a tract of land for $20,000. Subsequently, Mullen learns that there is oil
under the land and that the land is worth $1 million. The agency and Mullen’s authority
to sell the land for $20,000 are terminated.
=
Bankruptcy. If either the principal or the agent petitions for bankruptcy, the agency
is usually terminated. In certain circumstances, as when the agent’s financial status is
irrelevant to the purpose of the agency, the agency relationship may continue. Insolvency
(defined as the inability to pay debts when they become due or when liabilities exceed
assets), as distinguished from bankruptcy, does not necessarily terminate the relationship.
=
War. When the principal’s country and the agent’s country are at war with each other,
the agency is terminated. In this situation, the agency is automatically suspended or
terminated because there is no way to enforce the legal rights and obligations of the parties.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
509). Cengage Textbook. Kindle Edition.
Chapter 15 – Creditors’ Rights and Bankruptcy
We will cover some aspects of business law with which I hope you never have to deal with in your
own personal lives but which you may inevitably have to deal if you own or work for a business that
deals with the general public. More formal definitions of these topics are contained within the
chapter, but I thought that a brief introduction would be helpful.
Security interests are legally recognized rights to an item of property associated with the contract for
the sale of that property that are retained by the seller after they sell a product to a buyer. This
allows the seller to retake possession of the item if the buyer does not fulfill their contractual duties.
For example, Sunnyside Toyota maintained a security interest in my 2005 Toyota Corolla when they
sold it to me. If I did not pay my monthly payment on my car loan, Sunnyside Toyota would have
been able to retake possession of the car.
Creditors’ rights are the legal rights possessed by individuals to whom money is owed under a
contract. Two years ago, I went to my doctor at the Cleveland Clinic to ensure that I was healthy
enough to train for and run my first full marathon. (Fortunately, I was!) After my visit, I had a bill
that was issued by Cleveland Clinic for the services that were provided that is related to the contract
I signed with them when I arrived on the day of my appointment. If I did not pay this bill, the
Cleveland Clinic had the right to utilize the rights given to creditors by law in order to obtain
payment.
Bankruptcy is a legal option available to debtors who owe large amounts of money and who lack the
financial resources to maintain payments on their debt.
10
What is a secured transaction?
A transaction involving repayment of debt that is secured by the debtor’s personal property.
What section of the UCC governs secured transactions in personal property?
Article 9 of the UCC.
What is covered in the definition of “personal property”?
Both tangible and intangible property is covered; the former consisting of actual physical
property owned or in possession of the debtor -- the latter consisting of non-physical assets
owned by the debtor that can be converted into cash (certificates of deposit, stock
certificates, insurance policies, etc.). Both categories often referred to as “collateral”.
Based on what you have read in the second paragraph on Page 436, do you think that a credit card
debt is a secured transaction? Why or why not?
It depends on the type of credit extended. In a “captive” CC transaction (a department
store’s own unique card, usable only in the store’s outlets), any CC transactions for goods or
services will involve a security interest for the department store until the subject purchase
amount is paid in full (this can be a very short or a prolonged period).
In an “independent” transaction (a bank issued CC for example), the seller receives full
purchase value almost immediately, which eliminates the rationale for any security interest.
However, a disputed transaction which later reduces or eliminates the independent card
payments to the seller – could result in the rebirth of a security interest on the part of the
seller, to remain until the seller and debtor resolve the dispute and the full amount owed.
Credit is extended without reference to collateral, and is based on the debtor’s assumed
intent and ability to repay. What was purchased using the extended credit
What is a secured party?
A party that has met the qualifications for a secured interest in the debtor’s personal
property.
What is a debtor?
The party owing money to a seller.
Why would a creditor want to obtain a security interest?
To have the ability to offset the debt owed by obtaining the collateral, and to suppress the
rights to that collateral that might be claimed by additional creditors.
What are the three requirements for creating an enforceable security interest?
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The subject collateral must remain in the seller’s possession until the debt is repaid,
or there must be a written security agreement permitting the debtor’s possession on sale,
the seller’s having a security interest in the collateral, and with provisions for repossession in
the event of default.
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The seller must provide consideration to the debtor. Extension of credit to the
debtor is the most common.
=
The debtor must have “rights” consisting of possession and unconstrained use of the
collateral.
11
What is the purpose of a security agreement?
To provide a vehicle for perfecting a security interest. Without such an agreement, most
jurisdictions will not accept a
What is perfection?
The process by which the secured party safeguards their secured interest in the collateral in
question against claims from other creditors (of the debtor) to the same collateral.
In most situations, how does a secured party perfect a claim?
By completing and filing a “uniform financing statement” (UCC-1) form with the
appropriate public agency.
What is a financing statement?
A filing that serves notice to the public at large that a security interest is claimed.
For how long is a financing statement effective?
For five years.
What is a continuation statement? By when does it need to be filed in order to keep the original
statement effective?
The continuation statement extents the original statement by another five years, with that
period beginning with the expiration date of the original.
What three things must be included in a valid financing statement?
Signature of the debtor.
Addresses and other contacts for debtor(s) and creditor(s).
Description of the collateral involved in the security interest.
Does the description of the collateral need to be specific or is a general description acceptable?
Please explain.
A general description is acceptable, but depending on the nature of the collateral, more
specific ID may be desired. Some financing statements simply adopt the description in the
financing agreement.
When dealing with an individual debtor, in which state must the financing statement be filed?
For individuals, state of primary residence.
When dealing with a business or corporate debtor, in which state must the financing statement be
filed?
For corporations, partnerships, etc. the state of formation of incorporation or partnership
agreement.
What are the situations in which security interests can be perfected without filing?
When the collateral is transferred to possession by the secured party; in various other
circumstances, and by PMSI.
12
What is a Purchase –Money Security Interest?
A security interest granted the seller upon the transaction for the goods or services, when
the purchase price is not fully paid on sale and there is a balance due.
When is a PMSI in consumer goods created?
Typically immediately upon purchase, if there are any “terms” (credit extended) granted to
the buyer (now debtor).
Please read and explain the rules of priority that are detailed on Page 438:
Filing (perfecting) the security interest before any others grants first priority.
Please describe what the “self-help” provision of Article 9 allows secured parties to do when default
occurs:
Basis for repossession “industry” (tangible goods) – the secured party can demand return of
the collateral and hold same until the debt is extinguished. This activity does not always
satisfy the debt, and court action and judgment against the debtor may be pursued.
What is a lien?
A lien is a formal claim against property to satisfy a debt in default.
What is a mechanic’s lien?
Typically a claim privilege available to tradesmen that takes priority over security interests.
Mechanics’ liens are made available by statute and executing such can vary by state.
What is an artisan’s lien?
A lien privilege available to “artisans” that stems from common law. Common in the areas
of fine art, jewelry, special antiques, etc. Requires possession of the article involved by the
lienholder is required; terms of services involved must be cash (no extended credit)..
What is a judicial lien?
A lien against the possessions (including cash) of the debtor property filed either before or
following a court judgment against the debtor.
What is attachment?
A court ordered seizure of property to satisfy a debt issued prior to the actual court action
and judgment.
What must a creditor do in order to attach before a court issues a judgment?
Satisfy the statutory requirements of the host jurisdiction. The creditor must file
appropriate evidentiary papers and post a bond before attachment can take place.
What is a writ of execution?
Issued by a court on request if the original judgment against the debtor has not been paid.
The sheriff of the involved county can seize involved assets, sell these, and the funds
returned to the creditor. There are important exemptions to any such action (“necessities”)
including a primary home, vehicle and others.
13
Who receives the proceeds of the sale of property that is seized using a writ of execution and later
sold?
First the creditor, who receives the amount due plus applicable interest and awarded costs
of the court action. Any remaining proceeds go to the debtor.
What is garnishment?
Attachment of a portion of a debtor’s wages or a portion of the debtor’s bank accounts.
Garnishments are collected on behalf of the creditor. There are many exemptions from
garnishment and many variations of process by state.
What does an order of garnishment allow a creditor to do?
Garnishments are collected on behalf of the creditor. There are many exemptions from
garnishment and many variations of process by state.
What law—federal or state—governs garnishment procedure?
The Federal Consumer Protection Act provides certain limits to garnishment of wages.
TRUE or FALSE: Employers cannot dismiss an employee because their wages are being garnished.
True; federal law prevails.
What is a creditors’ composition agreement?
This agreement between creditor and debtor is usually intended to achieve a settlement of
less than the original amount owed. This agreement is then enforceable.
(Please skip all of the material about suretyships and begin reading at the “Protection for Debtors”
section at the top of Page 444.)
Please describe the scope of the property that is covered within the homestead exemption:
This exemption from judgments is restricted in type (primary home only) and value (there is
a cap on the exemption claimed – currently $146,450 in equity). There are other restrictions
that might be applied.
What types of personal property cannot be taken to satisfy judgment debts?
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Household furniture up to a specified dollar amount.
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Clothing and certain personal possessions, such as family pictures or a religious text.
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A vehicle (or vehicles) for transportation (at least up to a specified dollar amount).
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Certain classified animals, usually livestock but including pets.
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Equipment that the debtor uses in a business or trade, such as tools or professional
instruments, up to a specified dollar amount.
What are the goals of bankruptcy proceedings?
First, to protect the debtor and provide for rehabilitation of financial affairs free from
continuing demands for previous creditors – and second, to provide whatever relief for these
creditors is possible, through the bankruptcy formula.
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In which court do bankruptcy proceedings take place?
Federal bankruptcy courts, under the arm of federal district courts.
Please list and describe the three major types of bankruptcy:
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Chapter 7: provides for liquidation of non-exempt assets of the debtor and
distribution of proceeds to creditors. All claims extinguished.
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Chapter 11: provides for a reorganization of a going concern, with agreements by
creditors to accept proposed settlements.
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Chapters 12 and 13 (applicable to farmers and fishermen in the former, and
individuals in the latter) provide for adjustments in debts owed. Applicable to petitioners
with ongoing steady income.
TRUE or FALSE: A debtor must be completely insolvent in order to file for bankruptcy
False.
Who is a consumer-debtor?
A person whose debts are associated primarily with the purchase of goods for personal
and/or household use.
What is liquidation?
A debtor filing under Chapter 7 will turn over all non-exempt assets to a trustee of the
bankruptcy court.
What occurs to a debtor’s property during a Chapter 7 bankruptcy?
The court appointed trustee will arrange for sale of the assets and the distribution of
proceeds to creditors.
What occurs to a debtor’s debts during a Chapter 7 bankruptcy?
These debts are extinguished (satisfied) in full.
What document begins a bankruptcy proceeding?
A petition to initiate bankruptcy.
What must be done BEFORE filing a petition for bankruptcy?
The petitioner must obtain credit counseling within 180 days prior to filing. For consumer
debtors, it must be proven that the debtor understands the process, agrees with the facts in
the petition, and that attorneys representing have met the standards of care applicable to the
situation.
Please list and describe the schedules that are contained within a Chapter 7 bankruptcy petition:
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A list of both secured and unsecured creditors, their addresses, and the amount of
debt owed to each.
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A statement of the financial affairs of the debtor.
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A list of all property owned by the debtor, including property claimed by the debtor
to be exempt.
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A list of current income and expenses.
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A certificate of credit counseling (as discussed previously).
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Proof of payments received from employers within sixty days prior to the filing of the
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petition.
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A statement of the amount of monthly income, itemized to show how the amount is
calculated.
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A copy of the debtor’s federal income tax return for the most recent year ending
immediately before the filing of the petition.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
448). Cengage Textbook. Kindle Edition.
What happens if the required schedules are not filed within 45 days after the filing of the petition?
The court automatically dismisses the petition.
What does the U.S. Trustee do?
Examines income data of the debtor and grants eligibility to file Chapter 7 petitiion.
Please describe the concept of “substantial abuse” with regards to Chapter 7 bankruptcy described
on page 448. When will it be presumed? When will it not be presumed?
This concept provides a process whereby eligibility to proceed under Chapter 7 is
determined based on current and prospective income. It will be presumed when evidence
of information regarding income is higher than the current threshold, or is not accurate. It
will not be presumed when the debtor’s monthly income is below the local comparative
median income.
In addition to “substantial abuse”, what are the other two situations in which a motion to dismiss a
Chapter 7 filing may be granted?
If the petitioner is guilty of felony violet crime or drug trafficking or in default of ordered
child support or alimony payments.
What order will be granted by the bankruptcy court if the petition is found to be proper?
The Order of Relief.
occur?
When the petition is filed by one or more creditors.
Please list and describe the two rationales that can lead a court to dismiss a debtor’s challenge to an
involuntary bankruptcy:
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The debtor has not been making timely payments on debt.
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The debtor’s assets have been taken by a receiver or other custodian within 120 days
of the bankruptcy petition filing.
When is an automatic stay granted?
Immediately on the filing of either a voluntary or involuntary petition for bankruptcy.
What exceptions exist to the automatic stay?
Several related to payments due family members (or estranged family members) awarded by
court action (support, alimony), and investgations by a securities agency (SEC, etc.).
What limitations exist on the automatic stay?
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Creditors have the right to petition for a relief of stay effective 60 days after filing. If the
debtor has had a previous petition for bankruptcy relief dismissed during the previous 12
months, the stay will be lifted 30 days.
Please describe the concept of estate in property:
All of the debtor’s interests in property, income from property, shares in property jointly
owned with others, including community property where applicable.
What is the time frame in which gifts, inheritances, and other property that is acquired by the debtor
can become part of the estate in property?
These assets are subject to be included if acquired d by the debtor within 180 days of the
bankruptcy petition fiiling.
Please list and describe the responsibilities and powers of the bankruptcy trustee:
The trustee is ordered to take control of the assets now in the estate of property and to
liquidate these and provide proceeds to creditors. The trustee has 2 year period to
complete. 10 days from appointment, trustee must deliver an opinion to all involved as to
evidence of any abuse of the process via means testing. In process, key powers are the
“strong-arm” power (the right to demand debtor assets from other parties that may be in
possession), and the “powers of avoidance” (the ability to void transactions involving the
debtor’s assets and take them into the estate for disposition).
Please list and describe at least five of the types of property that is exempt from being seized during
bankruptcy proceedings:
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Up to $21,625 in equity in the debtor’s residence and burial plot (the homestead
exemption).
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Interest in a motor vehicle up to $3,450.
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Interest, up to $550 for a particular item, in household goods and furnishings,
wearing apparel, appliances, books, animals, crops, and musical instruments (the aggregate
total of all items is limited to $11,525).
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Interest in any other property up to $1,150, plus any unused part of the $21,625
homestead exemption up to $10,825.
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Interest in any tools of the debtor’s trade up to $2,175.
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A life insurance contract owned by the debtor (other than a credit life insurance
contract).
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The right to receive Social Security and certain welfare benefits, alimony and
support, certain retirement funds and pensions, and education savings accounts held for
specific periods of time.
11. The right to receive certain personal-injury and other awards up to $21,625.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
453). Cengage Textbook. Kindle Edition.
What occurs at the creditors’ meeting?
The trustee attends, the debtor attends (under oath) and creditors attend. The case is
reviewed, the assets available are described, the debtor receives information related to this
order of relief and any alternatives available to him.
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Please describe the way in which property is distributed in a Chapter 7 bankruptcy:
The estate in property is aggregated, and distributed in the form of cash or tangibles in this
order: secured creditors – unsecured – and the debtor (should there be any proceeds
remaining).
TRUE or FALSE: Chapter 7 bankruptcy may not discharge all of the debtor’s debts
True.
Please list and describe the debts that are not discharged in bankruptcy:
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Claims for back taxes accruing within two years prior to bankruptcy.
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Claims for amounts borrowed by the debtor to pay federal taxes or any
nondischargeable taxes.
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Claims against property or funds obtained by the debtor under false pretenses or by
false misrepresentations.
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Claims based on fraud or misuse of funds by the debtor or claims involving the
debtor’s embezzlement or larceny (see pages 168 and 165, respectively, in Chapter 6).
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Domestic-support obligations and property settlements.
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Claims for amounts due on a retirement loan account.
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Claims based on willful or malicious conduct by the debtor toward another or the
property of another.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
455). Cengage Textbook. Kindle Edition.
Please list some of the situation in which a court can refuse to grant a discharge of debt:
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The debtor’s concealment or destruction of property with the intent to hinder, delay,
or defraud a creditor.
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The debtor’s fraudulent concealment or destruction of financial records.
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The granting of a discharge to the debtor within eight years prior to the filing of the
petition.
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The debtor’s failure to complete the required consumer education course (unless
such a course was not available).
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Proceedings in which the debtor could be found guilty of a felony. (Basically, a court
may not discharge any debt until the completion of the felony proceedings against the
debtor.)
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
456). Cengage Textbook. Kindle Edition.
What is a reaffirmation agreement?
An agreement by the debtor to honor a debt even though it may be dischargeable in the
bankruptcy process. A fairly common approach by a debtor wanting to retain control of an
appreciating property, for example.
What is the bankruptcy used most commonly by corporate debtors?
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The process known as reorganization (Chapter 11 in bankruptcy). It involves negotiation
between debtor(s) and creditors to settle outstanding debts. It avoids liquidation and can
salvage a going concern.
What is a workout?
Attempts to settle obligations outside the formal processes of bankruptcy. Creditors that
can see a faster and less costly process of debt settlement often favor this approach.
When can a court dismiss a petition for Chapter 11 bankruptcy?
When the court determines that the action would be in the best interests of creditors, for
various reasons including little evidence of the debtor having the ability to repay.
What is a debtor in possession?
A Chapter 11 debtor that is given the right to continue operations under bankruptcy, but
subject to certain operating requirements that must be met, or a trustee is likely to be
appointed.
What is the goal of a reorganization plan?
A return to solvency and normal, profitable operations by the debtor.
What four things must be done by a reorganization plan?
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It must designate classes of claimants (creditors).
It must specify treatments of each class of creditor.
Provide means to execute the reorganization.
Provide to repay all valid tax claims within a five year period.
In what circumstance can a class of creditors reject a reorganization plan?
When less than two-thirds of the creditors in all classes do not accept the plan proposed.
Who is eligible for Chapter 13 bankruptcy?
Individuals who collect regular income who have defaulted on fixed unsecured debts not in
excess of $360,475 or fixed secured debts of no more than $1,081,400.
How can a filing for Chapter 13 bankruptcy be initiated?
The individual debtor can file a voluntary petition or convert from another bankruptcy
petition underway (Chapter 7). Chapter 13 can also be used for certain other business
reorganizations; requires a trustee appointment.
When can a bankruptcy court dismiss a Chapter 13 petition?
Whenever the court suspects that something other than “good faith” is behind the
petitioner’s request.
What must be contained within a repayment plan?
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The turning over to the trustee of future earnings or income of the debtor as ecessary
for execution of the plan.
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Full payment through deferred cash payments of all claims entitled to priority, such
as taxes.
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Identical treatment of all claims within a particular class. (The Code permits the
debtor to list co-debtors, such as guarantors or sureties, as a separate class.)
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page 461).
Cengage Textbook. Kindle Edition.
When must a debtor start making payments under the repayment plan?
Within 30 days of the filing of the plan.
What happens if a creditor has a problem with the repayment plan?
The plan will not be approved.
What occurs after all payments are completed?
Debts that are not exempt are discharged. Exemptions include court-ordered payments of
spousal support, felony property damage/injury, and some tax claims are not discharged.
Chapter 16 – Mortgages and Foreclosures after the Recession
What is a mortgage?
It is a written instrument of debt issued with real property as collateral for the debt
repayment.
What is a mortgagor?
The party that provides the security interest by agreeing to the terms and conditions
included in the written documents.
What is a mortgagee?
The party that provides the financing and receives the security interest in the collateral
involved.
What happens when a debtor defaults on a mortgage?
Typically after due process, the mortgage holder begins foreclosure proceedings, which can
result in the mortgagor losing all rights to the property collateral.
What is a down payment?
A portion of the sale price of an asset – whether or not involving real property. In the case
of real property, the initial and partial payment to execute the transaction.
What is a fixed-rate mortgage?
A mortgage that has a stated interest rate (nominal and/or APR) that will not change over
the term of the mortgage.
What is an adjustable-rate mortgage?
A mortgage that has provisions for adjustment of the interest rate under certain time and
circumstantial conditions.
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What is an interest-only mortgage?
A mortgage in which all payments over time go only to interest due – there is no reduction
in the principal of the loan due.
What is a subprime mortgage?
A mortgage issued without reference to generally accepted borrower finances, income,
ability to pay, or fair market valuation of the real property.
What is a balloon mortgage?
A mortgage that ends the original extended payment plan and calls for all or a substantial
repayment of the remaining principal and interest due on a certain date (i.e, 5 years from the
date of the mortgage).
What is “home equity”?
The estimated difference between fair market value of the “home” if sold, and the proceeds
to owner after all debt is discharged.
What is a home equity loan?
A loan based upon a percentage of the estimated “equity” the owner may currently have in
the property, based on valuation techniques. A lien is placed upon the property as the
secured interest of the lender.
TRUE or FALSE: Mortgages must comply with the Statute of Frauds.
True.
Please list and describe the terms that must be contained within mortgage documents:
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The terms of the underlying loan. These include the loan amount, the interest rate,
the period of repayment, and other important financial terms, such as the margin and index
rate for an ARM. Many lenders include a prepayment penalty clause, which requires
the borrower to pay a penalty if the mortgage is repaid in full within a certain period. A
prepayment penalty helps to protect the lender should the borrower refinance within a
short time after obtaining a mortgage.
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Provisions relating to the maintenance of the property. Because the mortgage
conveys an interest in the property to the lender, the lender will require the borrower to
maintain the property in such a way that the lender’s investment is protected.
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A statement obligating the borrower to maintain homeowners’ insurance on the
property. Homeowner’s insurance (also known as hazard insurance) protects the lender’s
interest in the event of a loss due to certain hazards, such as fire or storm damage.
Miller, Roger LeRoy (2012-12-21). Cengage Advantage Books: Business Law Today: The Essentials (Page
473). Cengage Textbook. Kindle Edition.
What is predatory lending?
Lending in which the borrower is a victim of unethical or downright illegal practices on the
part of the mortgagee (or its representatives). These practices include falsifying borrow
information, lack of disclosure of critical terms to borrowers, misinformation.
Please list the terms that must be disclosed under the Truth-in-Lending Act:
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A mortgage documentation must include the amount of the loan, terms and repayment
conditions, stated interest rate and whether fixed or variable, and the “APR” (calculate
annual percentage rate) given the various charges required to be financed via the mortgage.
Please skip the material between “Protection for High-Cost Mortgage Loan Recipients” and
“Foreclosures”. Please begin reading at the bottom of Page 477.
What is foreclosure?
The process whereby a lender begins repossession of the property representing the security
interest. Essentially the borrower loses all equity and any rights so associated.
What is forbearance?
A relaxation of the loan terms and conditions to permit the borrower more time and
flexibility to meet all obligations, including the mortgage. Simple to state and quick to
execute.
In the foreclosure context, what is a workout agreement?
A more formal agreement between home owner-borrower and lender that in detail lays oujt
a modified repayment plan, in the hope of avoiding foreclosure.
What assistance can be provided by the U.S. Department of Housing and Urban Development?
It is limited and typically must be combined with other sources of assistance (local agencies
involved in housing programs). However the borrower must be able to make payments on
the HUD loan granted or a combined HUD/local/bank financing. Thus the lowest
income borrower in trouble, jobless, broke – is not seen as the main potential target.
What is a short sale?
A sale on the open market that has been approved by the lender holding the mortgage. It
typically involves the homeowner proposing a sale price (typically lower than prevailing
market), and submitting this to the bank for approval. Because of this roundabout process,
time required, misunderstandings, “short sales” are not very popular in real estate circles.
What are some advantages of a short sale?
The main is the avoidance of the costs and time impacts of actual foreclosure. The
borrower is relieved of the debt that has proved too great a burden. The potential buyer
may be getting a “deal” because of the circumstances.
What are some disadvantages of a short sale?
For the lender, a loss in the event sale proceeds are less than local balance – quite common.
For the seller, due to the circumstances, a loss of whatever equity might have remained or
was possible in a true market value sale.
What is a sale and leaseback?
For any type of property, the current owner CO agrees to sell and transfer title to new buyer
XY. Terms include a lease of all or part of the property to owner CO (thus “saleleaseback”). CO gets to free up equity from an asset; new owner XY picks up a new hard
asset and a solid lease to go with it.
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What is the purpose of the Home Affordable Modification Program?
It is a national program designed to encourage private lenders to modify existing home loan
payment plans to deal with customers who are in danger of foreclosure due to changing
financial circumstances. It is basically yet another taxpayer contribution to the very
negative impacts of very loose lending standards previously, and the amount of ill-advised
subprime lending that took place.
What occurs when a deed in lieu of foreclosure is utilized? What are the advantages of utilizing this
method?
The mortgagee is offered the property entirely as satisfaction for the loan amount
outstanding. Done properly in the right markets, this process can significantly cut lender
losses by reducing the costs and time lost in actual foreclosure. For the debtor, the process
will significantly lessen changes for a lingering poor credit rating that would accompany
foreclosure.
Please list and describe the two types of foreclosure:
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=
Judicial foreclosure – supervised via the courts, available in all states.
Power of sale foreclosure – handled via the lender without court supervision.
What is an acceleration clause?
This clause in the mortgage benefits the lender only – it permits the onset of a loan default
to support a call for the entire amount due (principal and accrued interest) as the basis for
the foreclosure.
What is used to initiate a foreclosure?
Lenders file a Notice of Default that is publicized. This begins a 90-day clock within which
the borrower can repair the default and have the notice withdrawn. There are many
Notices of Default visible in Cleveland metro area real estate listings; far fewer (but still too
many) foreclosure proceedings announced.
What will be issued if the borrow does not pay the loan after a notice of default is received?
A Notice of Sale.
What occurs after a homeowner receives a notice of sale?
At this point, the lender engages the local sheriff to conduct an auction for the property.
Full payment of the settled price is required within hours and auctions tend to be dominated
by parties who deal in these “damaged” properties.
What can the mortgagee do if the proceeds from a foreclosure sale are insufficient to pay off the
mortgagor’s debt?
For years, lenders routinely have gone back to court to seek deficiency judgments against
the original homeowners. The amounts demanded were the difference between total
accrued payoff value of the original loan, and the actual proceeds after auction/sale.
Ohio has a particularly unhappy set of potential deficiency judgment situations for the poor
borrower who has lost the home. Ohio does not permit non-judicial foreclosures. There
are limits, however, on the amount to be claimed, depending on how the auction sale was
conducted. And there is a 2 year limit for enforcing any such awarded deficiency judgment.
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In California by contrast, most of the foreclosures are non-judicial (though this is changing
a bit). Deficiency judgments are not permitted in non-judicial foreclosures; thus these have
been far less prevalent.
What is an equitable right of redemption?
The borrower has the right to cure the default on the loan, stop the process and regain full
title to the property – up to the sale of the property at the auction.
What is a statutory right of redemption?
This (rather unpopular with auction buyers) right permits the original borrower to cure the
default and seek possession and title of the property even after sale, and even with a judicial
foreclosure proceeding. Not available in Ohio except for liens placed on property by US
Government agencies.
It is not difficult to see how those seeking to pick up properties for investment/resale at
auction would view statutory redemption as a “conditional” and risky sale.
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