Wednesday, April 27, 2011

Wednesday, April 20, 2011

April 20, 2011 - Homework

Chapter 10 (pricing - note our price sheets) and Chapter 12 (accounts payable and the carry/note terms, dating).

*** I will cover chapter 15 global in the last class.***

April 20, 2011 - Chapter 7 Buying an Existing Business (Part II)

Buying a business - part II:

AGENCY
CREATION: An agency relationship results when one party (principal) authorizes another (agent) to represent the principal in business dealings with third parties, and the agent consents to do so.
TERMINATION: Agency may terminate upon: (1) Lapse of time (reasonable if not specified, (2) Happening of a specified event, (3) Change in Circumstances, (4) a unilateral act of principal or agent, (5) Death, or (6) Loss of capacity.
• Irrevocable Agency: An agency is irrevocable if the agent has an interest in the subject matter of the agency.

DUTIES OF PRINCIPAL AND AGENT
Terms of Agency: The terms of agency are whatever the parties agree to and the implied terms (by operation of law).
Implied Agent Duties
1. Duty of Loyalty: An agent has a fiduciary duty to act solely for the benefit of the principal. [Dual Agency: An agent may represent principals with adverse interests only if both principals have full knowledge and consent to the dual agency.]
2. Duty of Obedience: An agent has a fiduciary duty to obey all reasonable direction from the principal. (Exception: Illegality).
3. Duty of Care: An agent has a duty to act with skill in the kind of work they are to perform. (This applies to gratuitous agents as well.)
Implied Principal Duties
1. Compensation - A principal has a duty to compensate the agent for services within the course of agency. If no contract was made, the agent may have a claim in quasi-contract (quantum meruit).
2. Reimbursement - The principal owes the agent a duty of indemnification of all expenses or losses reasonably incurred in authorized agency duties.
3. Duty to Cooperate - The principal has a duty to cooperate in agency performance and not frustrate the agents efforts.


RIGHTS AND LIABILITIES
A. Third Parties v. Principal (When principal is bound by agent’s actions).
1) Actual Authority - An agent has actual authority to do anything communicated by the principal (1) expressly, or (2) impliedly by need, custom and usage, acquiescence, or emergency.
2) Apparent Authority - An agent has apparent authority when the principal “holds out” to third parties the agent has authority, and third party relies on it.
3) Estoppel - In the absence of actual or apparent authority, the principal may be liable if a third party relies upon agent to their detriment and the principal knew the third party was misled.
4) Respondeat Superior - When an agent is a servant and in the scope of employment. [Distinguish from independent contractor.]
• Servant - Determined by who controlled the method, manner, and means of the action.
• Course of Employment - Frolic is outside, detour is deemed inside. If benefit to employer then likely within scope.
5) Ratification - A principal may be bound by an agent acting without authority if the principal subsequently ratifies the agent’s action (by affirmance or accepting the benefit of the act.)
6) Inherent Power - If no other basis, it is arguable any foreseeable action of the agent yields principal liability.
B. Third Party v. Agent
1) Agent as Party to Contract - Then agent is liable to third party whether principal is or not.
2) Agent Misrepresentation of Agency
a. Disclosed Principal - When the existence and identity of the principal is known to the third party, then principal is always liable on a contract. The agent is liable on the warranty of proper authority.
b. Partially Disclosed Principal - When the existence only of the principal is known, agent and principal are jointly and severally liable on a contract.
c. Undisclosed Principal - Then agent alone is liable.
3) Agent Liability for Torts - An agent is always liable for their own torts. A principal will only be held liable if in an employer-employee setting.
C. Agent v. Third Party - An agent can bring a contract action in the name of the principal, or on his own if he was a party to the contract. Agent can bring tort action against third party (e.g. physical or interference with agency.)
D. Agent v. Principal - An agent may repudiate the agency and bring an action for breach contract (terms or implied duties), seeking damages, reimbursement, indemnification, and possibly an agent’s lien. [NOTE: Agent has a duty to mitigate]. Agents can bring tort actions against principals also.
E. Principal v. Third Party - The Third Party is liable to principal on a contract, unless the principal was undisclosed and (1) agreement with agent precluded liability to another, or (2) principal knew of agent’s non-disclosure and third party would not have entered the agreement. The third party is liable for torts, including interfering with principal/agent relationship.
F. Principal v. Agent - The principal may repudiate the Agency And Bring An Action For Breach Contract (Terms Or Implied Duties), Seeking Damages (Including Secret Profits), Seek An-Accounting, Withhold Compensation, Or Possibly Specific Performance.


PARTNERSHIP
CREATION: A partnership is an association of two or more persons to carry on as co-owners, a business for profit. No written or formal partnership agreement is necessary.
• Written Agreement: A written partnership agreement controls the relationship; in its absence, the RUPA provisions apply.
• Proof of Existence of a Partnership: Courts look to the intent of the parties. Sharing of profits is prima facie evidence of a partnership. (Examples non-dispositive includes payment of debt, wages, rent, sharing gross revenues, title to property, designation.)
• Admission of New Partners: New partners are allowed only upon the unanimous consent of the existing partners.

RIGHTS AND DUTIES OF PARTNERS
A. Fiduciary Duties: Each partner has a fiduciary duty to all other partners of the utmost good faith, fair dealings, and full disclosure. [Agency duties of obedience, loyalty, and care also.]
B. Use of Partnership Property: Each partner has the right to use any partnership property for partnership purposes. Partnership property cannot be assigned, mortgaged, bequeathed, or attached by creditors of individual partners.
C. Partner’s Economic Interest: Is the right to share in partnership profits and surpluses. It is each partner’s personal property and may be transferred by each partner. HOWEVER, the assignee does not become a partner, they just have rights to that share of the profits/losses.
• Right to Share in Profits and Losses: If not otherwise specified, profits are shared equally; losses are apportioned the same way as profits.
D. Voting and Management: Each partner has an individual vote (regardless of their respective contribution). A majority is required for action.
E. Partner’s Ability to Bind Partnership: Each partner is an agent of the partnership with the authority to carryout partnership business and bind the partnership. (This includes unauthorized actions.)
F. Legal Action Between Partners: Generally not allowed until an accounting and dissolution have occurred. Tort and negligence actions between partners are allowed.

OBLIGATIONS TO THIRD PARTIES
1. Partnership Liability: The partnership is liable for contracts entered by agents with authority to do so. (Agency law applies) The partnership is liable for the torts of agents in the ordinary course of employment.
2. Partner Liability for Partnership Contractual Obligations: All partners are jointly liable for most partnership obligations. Therefore, a third party may bring an action against the partnership, and each partner.
3. Partner Liability for Wrongful Acts (Torts) of Other Partners: Partners are jointly and severally liable for torts committed by a partner in the ordinary course of partnership business.
4. Professional Limited Liability Partnerships: Must have $1 million of malpractice insurance. Then partners are liable only for their own tort or the tort of someone under their direct supervision.

DISSOLUTION: Dissolution of a partnership occurs upon (1) the express will or act of a partner; (2) unlawful partnership activity; (2) death of a partner; or (4) bankruptcy of any partner.
• Contributions to Partnership: Each partner has a right to the return of their original contribution to the corporation upon dissolution.
• Partner Rights After Dissolution: Each partner has the right to have the business liquidated and his share of surplus paid in cash.
• Business After Dissolution: If the partnership continues to transact business after dissolution, it is simply a new partnership (or sole proprietorship if only one person.
• Liability After Dissolution: The partnership and partners are liable for winding up actions, and any activity conducted with third parties who knew of the prior partnership but where unaware of the dissolution.

WINDING UP: After dissolution, old business must be concluded before termination: this is winding up. The assets are then reduced to cash to satisfy in order: outside creditors, partner loans to partnership, contributions of capital, and surplus or profits. If there is a deficiency in satisfying creditors, each partner will contribute to the cure.

TERMINATION: The partnership is not completely terminated until wind-up is complete.


LIMITED LIABILITY COMPANIES

DEFINITION - An LLC is a partnership and corporation hybrid. It is an artificial entity where members have limited liability, some formalities are required, and may have a management structure where some members or another entity are agents.

CREATION - An LLC is requires filing a certificate of formation with the secretary of state listing the name, registered office, principal place of business, and purpose of business of the LLC.
• Written Agreement: A written LLC agreement is common and controls the relationship; in it’s absence, the ULLCA provisions apply.
• A majority is required for action. [BUT, a unanimous vote is required to amend an LLC agreement or admit a new member.]

MODIFYING MEMBERSHIP
• Admission of New Members: New members are allowed only upon the unanimous consent of the existing members.
• Withdrawal from Membership: A member may not withdraw unless it is provided for in the agreement or by unanimous consent of all members.
• Termination of Membership: A member automatically ceases being a member upon assignment of his interest to another, removal pursuant to the agreement, bankruptcy of the member, incompetency, death, or judicial order.

DUTIES OF MEMBERS AND MANAGERS
A. Fiduciary Duties: Every member and manager has fiduciary duties to the LLC. (No self dealings.)
B. Capital Contributions, Membership: A member’s ownership interest is proportionate to his capital contribution. Contribution can be in the form of cash, property, services rendered, future services, or promissory notes.
C. LLC Property: Whether property belongs to individual members or the entity is determined by the intent of the parties.
D. Member’s Economic Interest in LLC: Owners economic interest is proportionate to his capital contribution; and the interest is personal property. Such interest is fully transferable, but the transferee cannot attain any management rights.
E. Voting and Management: All management authority is vested in its members, who vote based on their percentage of ownership (capital contribution.) Management may be vested in its members or a management structure. Any legal person or entity may be a manager. If management is vested in managers, then members have no management authority and are not agents. (The members do vote for the management though).
F. Negligent Management: Members and managers are not liable for simple negligence in operation of the business (Business Judgment Rule), but are liable for gross negligence, intentional misconduct, and knowing violation of the law.
G. Distributions: No distributions are allowed if it would render the LLC insolvent. A member, who receives a distribution knowing it will render the LLC insolvent, must return it.

OBLIGATIONS TO THIRD PARTIES
1. Entity Liability: Traditional agency rules apply. (Members/Managers as agents for LLC). Contract liability depends on level of authority. Tort liability may result if the tort occurred in the ordinary course of the LLC’s business.
2. Personal Liability for Members and Managers: Veil of Limited Liability applies. Neither members, nor managers, are liable for contract or tort liability (the entity is alone); except, an individual is liable for his own torts.
3. Piercing the Veil: A third party may bring an action against the shareholders if: (1) the corporation does not comply with formalities, or (2) the corporation is undercapitalized at the onset and fraud was present in the interaction. (Piercing the veil does not result in dissolution, nor necessarily apply or affect other plaintiffs.)
4. Professional Limited Liability Companies: Must have $1 million of malpractice insurance.

DISSOLUTION AND TERMINATION: Dissolution is the termination of the entity’s existence. An LLC is dissolved by unanimous written consent, or one member becomes disassociated from the LLC and the remaining members do not consent to continuation of business.

WINDING UP AND DISTRIBUTION OF ASSETS: assets are reduced to cash to satisfy in order: creditors (including member/manager creditors), members for unpaid distributions, to members for repayment of capital contributions, and to members for profits. If there is a deficiency in satisfying creditors, they are out of luck (no personal liability of members).

April 20, 2011 - Chapter 7 Buying an Existing Business Instructor Notes

Checklist for buying or starting a business (per Chapter 7):

CREATION
1. Filing Requirement: Requires filing Articles of Incorporation with the Secretary of State, Copies of the Articles, Agent’s consent to act and paying the filing fee.
• The Secretary of State’s filing is conclusive evidence that all conditions precedent to the filing are complete.
• The Corporation’s existence usually begins at the close of the business day on the day of proper filing.
• If anyone commits a tort or enter into contract prior to incorporation, no corporate liability, but individuals will be personally liable.

2. The Articles of Incorporation: must contain (1) the incorporators’ names and addresses, (2) Corporation name (including Corp. or Inc.), (3) classes and number of authorized shares, and (4) Name and street address of registered agent.

3. Promoter Liability: (Agency Law Applies). Promoters acting on behalf of a corporation, knowing it does not yet exist, are liable unless 3rd party also knew the corporation did not exist. Promoter owes fiduciary duties to each other, investors, and to the corporation. Duties are: full disclosure, promote corporations interest (no self-dealing), and duty of good faith.

MAINTAINING CORPORATE EXISTENCE
1. Organizational Meeting - Must take place within 120 days of incorporation.
a. The meeting can be held upon call of the incorporators or initial directors if named in the Articles.
b. By the end of the meeting the corporation must have directors, officers, and bylaws.
c. After the meeting, an initial report must be sent to the Secretary of State.
2. Maintain Required Records: Principal Office Records – Must maintain at Principal Office – Current Articles and Bylaws,
Shareholder Actions, financial statements (3 years worth), General Written communications to shareholders and Annual
Report). Records Corp. should generally keep – All meetings and actions taken, action outside of meetings including board
Committee actions, appropriate accounting records and shareholder names and addresses.
3. Prepare: Annual Balance Sheet and Income Statement; File Annual Report and Pay License Fees; Hold Annual Meeting at
time and place specified in bylaws.
4. Hold Annual Meeting at time and Place specified in bylaws: Annual Meeting. Written notice required to shareholders of
Record within statutory period (not less than 10 (20 if fundamental matter) nor more than 60 days before meeting) Notice
must include time place and date.

CORPORATION GOVERNANCE
Shareholder Rights and Actions
1. Voting: Shareholders vote on director election, amendments to Articles, fundamental changes, director indemnity, and approving conflicting transactions. (Watch for directors giving self a benefit from corporation.)

2. Special Meetings: Special meetings may be called by shareholder(s) of 10% or more of the corporation’s shares.
• Notice Required: Notice of a special meeting must be given 10 - 60 days prior to the meeting, and must include time, date, place and purpose. (20-60 days if fundamental changes – see below.)
• Quorum Required: The shareholders may usually act by a majority of shares eligible if a quorum is present. A quorum is a majority of the shares. Shareholders may vote actually or by proxy.

3. Inspection Rights: A shareholder of a newly formed corporation may inspect and copy, upon five days notice, the articles, bylaws, minutes of and actions taken at shareholder meetings, financial statements, written communications to shareholders generally, list of current officers and directors, and the initial report to the Secretary of State. A proper purpose requirement must be met. If trying to take over corporation, still within proper purpose requirement.

4. Transfer of Stock: Shares of stock are freely alienable unless a valid restriction is in place.

5. Preemptive Rights: If not precluded by the Articles, shareholders have a right to purchase stock made available by the corporation for purchase on a pro rata share of their current interest.

6. Ability to Remove Directors: Shareholders may remove directors with or without cause unless Articles say for cause only. Court action is also available if directors breach duties (below).

7. Derivative Actions: If the board takes no action for a wrong done to the corporation, a shareholder may bring a derivative action. (This may be against a wrongdoing director, officer, or third party.)

8. Action for Ultra Vires Activity: If the corporation is outside of its authorized activity, shareholders can seek to enjoin the activity or get damages resulting if activity is complete.

9. Exercise Dissenter’s Rights: This is the right of shareholder to not vote in an issue and claim their stock value plus interest. (Unless not allowed by Articles.) Such rights are allowed in all fundamental changes except dissolution and some asset sales.

Board Rights and Actions
1. Authority and Form
• Corporate Power: All corporate power is vested in the board of directors. Directors are not agents of the Corp.
• Directors: No. of directors is set by the Articles or Bylaws. The board may consist of one or more natural persons.
• Officers: Specific officers are not necessary. There must be at least one officer responsible for preparing minutes and authenticating records. One or more offices may be held by the same person.
2. Meetings and Resolutions
• The board acts collectively and each director, no matter his shareholdings, has one vote.
• Directors may act by unanimous written consent or at meetings.
• Quorum Required: In a meeting, the board acts by a majority of directors present if quorum is present. A quorum is a majority of the number of directors.
3. Director Duties
a. Fiduciary Duties: Directors have fiduciary duties to the corporation to act in good faith, with reasonable care, and in the corporation’s best interest. Under the Business Judgement Rule, it is presumed directors act in conformity with their fiduciary duties. [Breach of duties = director liability to the corporation for damages].
b. Business Opportunities: A director that personally takes a business opportunity that came to him in his official corporate capacity and is in the corporation’s line of business may have taken it in trust for the corporation.

CORPORATE RELATIONS
Relation with Stockholders - Stock
1. Issuance: A corporation cannot issue more shares than the number authorized in the Articles. Board of Directors must authorize the issuance (sale) of shares by board resolution; sales of unauthorized shares are void.
2. Consideration for Shares: Shares must be issued for sufficient consideration which the board determines conclusively, provided it acts in good faith. Shares of stock may be exchanged for tangible or intangible property, cash, promissory notes, services performed, future services, or other securities.
3. Stock Purchased by Parties at Same Time: Shareholders purchasing shares at the same time must pay the same price. If the board, in good faith, determines the consideration govern for stock is adequate, no one may attack the sale due to inadequate consideration. [Shareholders may have preemptive rights regarding new sales of stock].
4. Subscription Agreements: A written subscription agreement is valid for six months unless a different time is specified.
5. Reacquisition of Stock: Corporations can reacquire stock and hold it for sale. (WA does not have treasury stock.)
6. Dividends: The board has power to issue dividends so long as the corporation can pay their bills when they come due and assets are greater than liabilities.
• Directors are personally liable if dividends are issued wrongfully.
• Dividends must be paid to each share equally.

Relations with Directors and Officers
1. Breach of Duties by Directors: (See duties above): Corporation can bring action or mitigate director damages. (Note: If corporation does not bring action, shareholders can bring derivative action.) Mitigation Methods include as provided in the Articles of Incorporation, Insurance, Indemnification if director wins, or possible if settlement occurs; Agency law applies to officers or Approval of director conflicting interest transaction.
2. Liability for Officers and Agents: A corporation is liable for the acts of its agents in the scope of their agency.
• An individual taking on behalf of a corporation should make it clear it is the corporation taking action and he is acting as an agent for the corporation. The best method is by signing ABC Corp. by Fred Smith, its president.
• A corporation may adopt or ratify actions done on its behalf, but this does not necessarily relieve the agent’s liability.

Relation with Third Parties (Agency rules apply).
1. Corporate Powers: A corporation may engage in any lawful activity unless a narrower purpose is stated in the Articles.
2. Ultra Vires Activity: If the corporation is outside of its authorized activity, third parties can seek to enjoin the activity or get damages resulting if activity is complete.
3. Piercing the Corporate Veil: A third party may bring an action against the shareholders if: (1) the corporation does not comply with formalities, or (2) the corporation is undercapitalized at the onset and fraud was present in the interaction. (Piercing the veil does not result in dissolution, nor necessarily apply or affect other plaintiffs.)

FUNDAMENTAL CHANGES
• Always requires 2/3 approval of all shares.
• 2 - 60 days notice required. For Directors and Officers can call meeting with only 2 days written or oral notice.

1. Amendment of Articles of Incorporation

2. Merger -A merger must be proposed by the board and approved by 2/3 of the shares entitled to vote. Shareholders are prior notice of the meeting, a copy of the plan of sale, and notice that the transaction triggers dissenter’s rights. If merger approved, Board and shareholders of both merged and surviving company must vote to approve. If Share exchange, both boards will vote, but only the merged (disappearing) company’s shareholders get to vote.

3. Sale of Substantially All Corporate Assets: A sale or transfer of all or substantially all of the corporation’s assets other than in the regular course of business must be proposed by the board and approved by 2/3 of the shares entitled to vote. Shareholders are prior notice of the meeting, a copy of the plan of sale, and notice that the transaction triggers dissenter’s rights.

4. Dissolution
a. Administrative Dissolution: The Secretary of State may dissolve, with notice, a corporation for failing to comply with payment of the annual fee or filing annual reports.
• The corporation may be reinstated within 5 years by curing the cause of dissolution. Reinstatement relates back to the date of dissolution.
• Also the state must give the corporation 60 days to cure if fail to pay fees or deliver reports when due.
b. Corporate Dissolution: Dissolution must be recommended to the board and approved by 2/3 of the shares. Upon approval, the assets are used to satisfy creditors, and then distributed to shareholders accordingly.
c. Effect of Dissolution: A dissolved corporation continues in existence but may not take any action except winding up its affairs.
d. Completion of Dissolution: Upon proper filing of Articles of Dissolution to the Secretary of State.

April 20, 2011 - Sales Instructor Notes

The Sale in Business

A. A sales contract is made in any manner that shows agreement, including conduct.
B. Method of Formation:
1. Verbal Offer and Acceptance – Parties may express their intent to agree by spoken words, written words or both. Is it an offer or just an invitation for an offer?
2. Verbal Offer, Acceptance by Conduct – A buyer’s offer to buy seeking prompt shipment can be accepted EITHER by seller’s promise to ship OR by Shipment of conforming or non-conforming goods.
3. Verbal Expression of Acceptance with Differing Terms -
• Rule: Sending a definite, timely expression of acceptance creates a contract even if the acceptance contains terms that differ from the offer. [If no definite, timely expression of acceptance, parties are still negotiating.]
• Rule: Between Merchants, the new terms become part of the contract unless either the offeror objects within a reasonable time, OR the new terms are material (causing hardship and surprise)
C. Essential Terms:
Parties must agree to what is to be sold and how much (quantity). Agreement on other terms is not necessary as the court can supply missing terms and provide a remedy.
If different terms - Court may use Knock out Rule (merchants) and use gap fillers.
D. Contract Modification:
Contracts can be modified by language or behavior indicating agreement to modify. No new consideration is required (as in common law) but the modification must be in good faith.

DEFENSES TO ENFORCEABILITY – STATUTE OF FRAUDS

A. Statute of Frauds is a potential defense
• The statute of frauds is a potential defense to enforcement of a contract that the parties have formed. The defense is available to any buyer or seller who has not signed a writing expressing the contract or indicating its existence.
B. Contracts for $500 or more must be in writing and signed. Rule: Unless an exception applies, a contract for a price of $500 or more is unenforceable unless the party to be bound has signed a writing indicating a contract between the parties and stating the quantity.
C. Satisfying the Statute of Frauds
• Can be satisfied by a formal written contract OR any writing which one could infer that a contract was made. [Letter to friend that references the contract; Buyer’s payment check mentioning the subject matter; A written objection that refers to the agreement.]


D. Misstated Terms:
• The writing need not state the terms correctly in order to satisfy the statute of frauds. The contract will not be enforced beyond the quantity stated.
E. Alternatives to the Writing Requirement: (The Exceptions) CAPS – Confirmation, Admission, Performance, Specially Mfg Goods
1. Merchant Confirmation (After oral contract)
• If a Merchant gives a sufficient signed writing (indicates quantity and an agreement) to another Merchant, who does not object in writing within 10 days, the statute is satisfied as to both parties.
2. Performance
• Delivery and acceptance of goods or payment satisfies the statute for the quantity of goods accepted or paid for.
3. Specially Manufactured Goods
• Baseball cap order with professor’s photo on it.
4. Admissions in Court
F. Waiver of Affirmative Defense – SOF defense may be waived if not asserted.

TERMS

A. Express Terms - in written agreement apply
B. New Terms - Become part of the contract unless they (i) material alter it, (ii) offer is limited to its terms, or (iii) original offeror objects within reasonable time. Between Merchants, a confirmation of an oral contract that contains terms different from the oral agreement is deemed to be a proposal for modification. The new terms modify the agreement unless they are material and it was not objected to within a reasonable time.
C. Commercial Context - Course of Dealings, Usage of Trade, Course of Performance.
D. Open Terms - Use Gap Fillers – default rules
1. Price = Reasonable price at time of delivery
2. Place = Seller’s place of Business
3. Time = Reasonable time
4. Payment = Due at receipt
5. Risk of Loss = At tender for non-merchant sellers; at delivery for merchant sellers; FOB seller in shipment contracts.
E. Output Contracts (however much seller can produce) and Requirement Contracts (seller will fulfill all of buyers.
F. Warranties – All issues involving the quality of the goods will be questions of warranty
1. Express Warranties – Rule: Any description of the goods that becomes part of the “basis of the bargain” creates an express warranty that the goods will conform to the description. Express Warranties are Created By:
a. Model or Sample
b. Description of Goods (“Commercial grade”)
c. Any Affirmation of fact or promise
2. Implied Warranties – Arises by operation of law.
a. Of Merchantability – Goods sold by a Merchant who deals in goods of that kind are warranted to be fit for there ordinary purpose. Fit for ordinary purpose means not defective – good enough to satisfy average buyer. An occasional sale is not enough to establish dealer status. Applies to both new and used goods.
b. Fitness for Particular Purpose. Goods sold by a seller who is aware that the buyer is relying on seller’s skill to provide goods fit for buyer’s particular purpose are warranted to be fit for that purpose.
i) Seller Knows of buyers use
ii) Buyer relies on seller

3. Disclaimer of Warranties
a. Express - Usually not allowed, but if made before the deal is closed, then arguably the warranty is not a part of the “basis of the bargain.”
b. Implied Warranty of Merchantability – disclaimer must either use the word “merchantability” or “as is,” and if in writing, it must be conspicuous.
c. Implied Warranty of Fitness - Must be both written and conspicuous.
F. Limitation on Remedies – Sellers can exclude remedies if it would not be unconscionable to do so. Contract may provide for exclusive remedy to repair or replace.
G. Risk of Loss – The risk of loss always starts on the seller and ends on the buyer. Where and when it shifts is determined by the agreement between the parties and the default rules if not discussed.
• When parties don’t agree: If the goods are delivered directly from seller to buyer without being shipped by a third party carrier, risk of loss passes when a buyer receives possession of the goods from a Merchant Seller
• If the contract permits seller to ship the goods via a common carrier like trucking company or ship, and nothing is said in the contract about risk of loss, then tender occurs and risk of loss shifts to the buyer when the goods are loaded onto the carrier. Note that tender must be conforming for risk to shift; non-conforming goods lost in transit are at the seller’s risk even after FOB point.
• Legal Effect of Loss: If goods are lost or damaged before risk of loss shifts, seller must re-perform and buyer is not liable for the price of the goods that are lost. If goods are lost or damaged after risk of loss shifts, then seller has fully performed and buyer must pay the contract price.
• But risk of loss does not shift if the tender is non-conforming. If non-conforming goods are lost or damaged, then seller must perform or be in breach.
• Installment v. Single Delivery Contract.

PERFORMANCE AND BREACH

A. Breach - Any failure to perform the obligations created by the contract.
B. Seller has duty to tender conforming goods - Perfect Tender Rule
C. Buyer has a duty to accept and pay for conforming goods
1. Buyer has right to inspect (Inspection at reasonable time, place, manner)
2. Acceptance occurs when buyer indicates acceptance or does any act inconsistent with seller’s ownership
D. Buyer must reasonably notify seller of rejection (if goods non-conforming)
1. Notice must describe defects in order to rely on them as a basis for breach
2. In single delivery contracts, the perfect tender rule applies, so buyer can reject the whole or any part of the delivery, or may accept the whole or any part
3. If Installment contract, the buyer may reject a delivery only if it is substantially non-conforming (material breach) If minor, the buyer must accept goods and later recover for damages.

E. Buyer’s right to revoke acceptance if:
• Acceptance was induced by latent defect or assurances of cure;
• The defect substantially impairs their value to buyer;
• Buyer gives notice of revocation within reasonable time after should have discovered defect; and Buyer can return goods substantially unchanged
F. Buyer’s Duty to Care for rejected Goods
1. Buyer must hold goods with reasonable care for seller for reasonable time
2. Merchant must follow seller instructions and sell if perishable.
G. Seller’s Right to Cure
1. Before shipment is due, seller has a right to cure.
2. After shipment, seller has reasonable time to cure upon notice to buyer
3. If no instructions from seller, buyer may ship, store or resell goods
H. Right to Adequate Assurances [Either party]
1. Right is availed upon reasonable grounds for insecurity
2. Demand must be in writing
3. Party may suspend performance until assurances are given
4. If no response in 30 days, party may treat it as repudiation.
I. Anticipatory Repudiation: [Either party] An event which makes it clear the other party is not going to perform, permits the party to treat the contract as repudiated; and thereafter may:
1. Await Performance
2. Seek Assurances
3. Seek Damages
4. A party who states unequivocally that she will not perform has breached the contract by repudiation and can be sued immediately for total breach. Repudiation is present if she does something that will make it possible for her to perform too.
J. Remember must always give notice of Rejection, Notice of Breach (but not necessary if seller just fails to deliver) and Notice of Revocation!

REMEDIES
RULE: The remedy for breach should make the non-breaching party as well off as if the contract had been fully performed by both parties. This is expectation interest.
A. Buyer’s Remedies
1. Cancellation of Contract
2. Recover Price Paid
3. Cover (Cost of Cover – contract price + consequential + incidental and return of anything already paid.)
4. Market Formula - If buyer does not cover, damages are: (Market Price – Contract Price plus consequential + incidental damages and return of any price already paid.
5. Consequential Damages (Lost Profits, Physical Harm) Must be both: Foreseeable by the seller at the time of Contract Formation; and Unavoidable by the buyer.
6. Incidental Damages (cost of inspection, storage, transportation, expenses involved in cover, out of pocket expenses in finding new goods like advertising.)
7. Warranty Damages (Value of goods as warranted - Value of Goods as delivered + consequential + incidental. Cannot recover price paid to seller!) NOTICE OF BREACH IS ESSENTIAL FOR RECOVERY WHEN ACCEPTING NON-CONFORMING GOODS. NO WAIVER OF RIGHT TO DAMAGES IF GIVE PROMPT NOTICE.
8. CANCELLATION – If seller repudiates or fails to cure a non-conforming delivery, or if seller’s breach materially affects the value of an entire installment contract, buyer may Cancel the contract. Cancellation ends all further duties to perform by either party and buyers claim for breach is preserved.
B. Seller’s Remedies
1. Recovery of Contract Price in three scenarios:
• Accepted goods, whether or not conforming
• Conforming goods lost while buyer has risk of loss
• Wrongfully rejected goods that seller cannot resell.
2. Seller’s Damages for non-accepted goods:
• Resale (Contract price – resale price + incidental damages)
a. Notice required
b. Commercially reasonable sale
• Market Formula (Contract price – market price + incidental - savings.)
• Lost Volume Dealer only – Net lost profit plus incidental damages.

Consumer Protection Act: Prohibits unfair and deceptive acts or practices occurring in trade or business that affect the public and cause injury to a consumer.

April 20, 2011 - UCC 9/Small Business Instructor Notes

SECURED TRANSACTIONS

THE NATURE OF TRANSACTIONS
Classification of Collateral: UCC 9 requires the secured creditor to classify the collateral based on the debtors’ intended, primary use at the time the security interest attaches.

• FARM PRODUCTS: Crops livestock, or supplies used or produced in farming operations; products of crops or livestock in their un-manufactured states if they are in the possession of a debtor engaged in raising, fattening, grazing or agriculture. (eggs, wool, berries on and off vine, milk, and gas for tractor. Wine, jelly or pasteurized milk is not considered farm products.
• INVENTORY: Goods held for sale or lease, raw materials, and supplies used up in a business, if not farm products.
• CONSUMER GOODS: Goods used primarily for personal, household, or family purposes.
• EQUIPMENT: Every other good. Durable goods used in a business or for farming.

ATTACHMENT – Did security interest attach?
Attachment creates an enforceable secured relationship between the creditor and the debtor. Attachment occurs when: (1) Secured party gives value, (2) Debtor has an interest in the collateral; and (3) Debtor either signs a Written Security Agreement identifying or describing the collateral OR ELSE gives possession of the collateral to Secured Party under an oral security agreement (a pledge).

Value: Is any consideration that would support a contract, including antecedent debt.

Adequate Description of Collateral: The description in the agreement must reasonably describe the collateral. For fixtures, the secured party must also reasonably identify the real estate on which the fixtures are located. *[The term “consumer goods” as description for collateral on Security Agreement is not specific enough for attachment to occur]

Effect of After Acquired Property or Future Advances Clause: A secured party can obtain a security interest in the debtor’s after acquired property only if the security agreement so provides. (It must also be included in the financing statement for perfection - see below).

Article 9 permits a debtor to grant a security interest in property to be acquired at a later time, except for consumer goods more than 10 days after the secured party give value.
Just say… UCC 9 validates after acquired property clauses.

When an interest attaches, the creditor becomes a secured party and has the right to repossess the collateral if the debtor defaults. In the absence of a signed written security agreement, the lender or seller’s interest never attached and therefore they are unsecured.

PMSI – Does lender or seller have a PMSI?
PMSI or Non-PMSI: A PMSI is created when the creditor provides funds (or a seller extends credit) to make the purchase of collateral possible; debtor grants a security interest in that collateral.
• Debtor must sign a security agreement in order for lender or seller to have a PMSI
• Lender’s loan must be intended for and actually used to purchase that particular collateral. (If problem says that bank perfected security interest in after acquired property, but does not say whether debtor actually used the borrowed funds to purchase the inventory it may not be a PMSI)

PMSI - Super-Priority: Under certain circumstances, a PMSI lender can achieve a “super-priority” upon proper perfection. (See below).

PERFECTION
1. If security interest has attached, has that interest been perfected?
2. Perfection makes the security interest enforceable against third parties and establishes priority.
3. Several methods of perfection exist and include automatic perfection, Perfection by Possession of Collateral, Motor vehicle Perfection and Perfection by Filing.
4. The method of perfection depends on the type of collateral, and always requires attachment..

Automatic Perfection
Consumer Goods: A PMSI for consumer goods is automatically perfected upon attachment and therefore has super-priority.

Non-PMSI
• Equipment, Inventory, Farm Products and General Intangibles: Requires central filing with the Department of Licensing.
• Timber, Gas and Minerals: Requires filing with the local County Auditor’s office AND central filing with the Department of Licensing.

PMSI - Super-Priority: Under certain circumstances, a PMSI lender can achieve a “super-priority” upon proper perfection.
• Consumer Goods: A PMSI for consumer goods is automatically perfected upon attachment and therefore has super-priority. (Exceptions: Certificate of Title, Fixtures.)
• Inventory: Before the debtor receives possession, the purchase money secured party must both 1) give notice to secured parties of record and 2) file. [This super priority defeats an earlier filed security interest in after-acquired property, or a floating lien. A purchase money lender who fails to satisfy these timing requirements will still be perfected upon filing but its priority will date from the time of filing, so it will be junior to the earlier lender.]
• Non-Inventory: To obtain super-priority in non-inventory, a properly perfected PMSI secured party must be perfected within 20 days of debtor receiving the collateral.

Perfection of Motor Vehicles
• A security interest in a non-inventory motor vehicle may be perfected only by endorsement on a certificate of title. If care is dealer’s inventory then financing statement must be filed.

Perfection by Possession of Collateral
• Usually if the creditor has possession of the collateral the security interest is perfected (Exceptions: Certificate of Title, Fixtures). Perfection of an instrument is by possession only. If have repossession at the end of fact pattern may be enough to perfect, but beware of other prior perfected interests.

Perfection by Filing
Requirements – Must be signed or authorized by debtor; give names and addresses of the secured party and debtor; and describe the collateral.

Filing / Financing Statement Considerations:
• *Signing – A debtor may either sign or authorize a financing statement. The debtor always authorizes the filing of a financing statement by signing a security agreement, therefore, if the debtor signs a security agreement, the creditor may file an unsigned financing statement, which will be fully effective so long as it contains the other information.
• Name Change - A financing statement that is correct when filed will remain effective if the debtor later changes her name, except for collateral she acquired more than 4 months after the name change.
• If debtor’s true name would be located using the filings search logic then financing statement is valid.
• *A financing statement that is filed only in debtor’s trade name is invalid.
• All financing statements should be filed with Dept. of licensing except fixtures. File those at local county auditor’s office.
• Like the security agreement, the financing statement must describe the collateral, either by item or type. In order for perfection to occur, the description in the financing statement must both match the description in the security agreement and match the actual collateral in question. Do not have to mention after acquired; F.S. sufficient if describe collateral as “all of debtor’s personal property.”
• If the debtor changes the use of the collateral, the financing statement will remain effective.

Fixtures - Fixtures are goods that are affixed to real property in a way that manifests an intention that the affixation be permanent. E.g. furnaces, boilers, elevators, doors, and other bldg. parts.
• Article 9 requires a secured party to file a financing statement as a “fixture filing” to perfect its security interest against buyers and mortgagees of the real estate.
• A valid fixture filing must contain a “legal” description of the realty to which the fixtures will be affixed and be filed with the county auditor’s office where the realty is located.
• If file a financing statement in the wrong place or fail to file it at all, the creditor or lender’s security interest is unperfected.

Post-perfection Events
• General rule: Security interest remains valid even if change in name, use of collateral or type of business.
• Financing Statements will lapse after 5 years unless a continuation statement is filed within 6 months before lapse.

PRIORITY
Generally, the first secured creditor to file OR perfect their security interest has priority. Absent perfection, the rule is first in time - first in right.
1. Unperfected v. Perfected - Between two unperfected security interests, the first to attach has priority.
2. Perfected v. Unperfected – A perfected security interest always beats out any unperfected security interest
3. Perfected v. Perfected – Between two perfected secured parties, the first to file or perfect wins if the second one does not have a PMSI. The other “junior” creditor will still have a perfected security interest in the collateral, but will not have priority.
4. Perfected v. Purchase Money Security Interest –
• Inventory: Before the debtor receives possession, the purchase money secured party must both 1) give notice to secured parties of record and 2) file. [This super priority defeats an earlier filed security interest in after-acquired property, or a floating lien. A purchase money lender who fails to satisfy these timing requirements will still be perfected upon filing but its priority will date from the time of filing, so it will be junior to the earlier lender.]
• Non-Inventory: To obtain super-priority in non-inventory, a properly perfected PMSI secured party must be perfected within 20 days of debtor receiving the collateral.

Priorities in Fixtures
A fixture filing will defeat subsequent buyers or mortgagees of the realty to which the collateral is fixed.

If it is a PMSI fixture filing within 20 days of affixation, it will even defeat prior mortgagees. If a secured party fails to file a fixture filing, she will lose in priority to real estate claimants, but if she perfects in any other way she will defeat any other claimants to the fixture.

BUYERS OF THE COLLATERAL
• Generally, Unless an exception applies, if the collateral is sold without the secured parties consent: 1) A buyer in good faith will take collateral free from an unperfected security interest in the collateral; and 2) A buyer in good faith will take collateral subject to a perfected security interest.
• Exception 1: PMSI Relation Back defeats Gap BFP
Seller delivers equipment to buyer taking back PMSI. Seller secured party files 18 days later – within 20 day grace period, but on 15th day a good faith purchaser, unaware of the security interest buys the equipment. Filing within grace period causes the perfection to relate back to the date the debtor received possession, so the secured party seller is perfected and the buyer is out of luck.
• Exception: A Buyer in the Ordinary Course: Takes free of a security interest created by his seller. To qualify as such, a buyer must prove he in good faith bought the goods in the ordinary course from someone in the business of selling that kind. *This does not apply to Buyers of Farm Products. Buyers in the ordinary course do not take free of security interests. Such a buyer can take free under federal law, if the buyer satisfies its requirements involving notice to the secured party. Just mention the federal statute.
• Exception: Consumer to Consumer Transactions: If goods are consumer goods in both buyer’s and seller’s hands, the buyer will take free of an unfilled (automatically perfected) security interest.

Proceeds: Generally, a secured party automatically has a secured interest in the identifiable proceeds of the collateral. Proceeds include whatever is received when the collateral is sold, exchanged, or otherwise disposed of.
• A security interest perfected by filing will remain perfected in cash proceeds for as long as they remain “identifiable.” They cease being identifiable when they become untraceable or the debtor spends them.

DEFAULT AND REMEDIES
Creditor Rights: When a debtor defaults in its obligations to the secured creditor, the creditor can seek a judicial foreclosure judgement or Repossess the collateral under the security agreement, provided there is no breach of the peace when repossessing. After repossession, the secured may:
(1) Sell the collateral and get a deficiency if applicable, so long as the sale was commercially reasonable and the debtor was notified of the sale; OR
(2) Keep the collateral in satisfaction of the debt so long as debtor was notified of proposal and did not object, or if consumer goods and over 60% paid, then the goods must be sold.

Debtor Rights:
• Prior to sale, a debtor has a right to redemption.
• If the creditor does not follow the above procedures, the creditor will be liable for damages caused by such and may loose the right to a deficiency.

Wednesday, April 6, 2011

April 6, 2011 - UCC 2 (con't)

UCC 2 Apply

Are you selling, or is there a transaction in goods? This includes computer software, timber, and crops. If UCC applies, then is the agreement between merchants? Why is this important?

> A merchant is one who deals in the goods of this kind OR, holds himself or herself as having special knowledge/skill (i.e., I'm just an old country boy example - play dumb out there).

MUTUAL ASSENT

> Offer, communicated to another - not a request to negotiate or bid

> Was the offer revoked prior to acceptance?

If not revoked,

> Acceptance - express, sent by authorized means (why we use ASN)


- Beginning performance, only if the offeror is notified with a time after performance has begun so that the offeror cannot revoke during performance.

- By shipment of goods (i.e., ASN and Invoice on ship)

> Where the goods non conforming? Look to the following - are both parties merchants? If not merchants, then buyer, or customer has benefit of doubt. KEY - look at only dealing with merchants (i.e., wholesale trader)

Missing terms? UCC gap fillers.

> Consideration

> Revocation

* * *

Can always void on:

Illegal (crime, tort)

Unconscionable (contrary to public policy); can't limit personal injury damages

Statute of Frauds - certain K's require writing, e-mail is good, and $500 or more must be in writing - note again our paper trails - ASN, Invoices, et al.

Capacity - under 18, void; unfair (duress, undue influence), mistake of material fact

Remedies

- Judgment
- Quasi K
- Unjust enrichment
- Three R's - Rescission, Restitution, Reformation (are there any Lutherans in the room)

If K is Valid

- Are parties merchants? - Implied warranty of merchantability.

Disclaimer
Course of Dealing

April 6, 2011 - Reading Homework

Chapters 11/12.

April 6, 2011 - Rules of Business

#1

No. 1 - Never lose money, Rule No. 2 - never forget rule No. 1.

* * *

#2 Never be afraid to ask for too much when selling or offer too little when buying. *** Note Chapter 10 on pricing strategies

#3. You can't make a good deal with a bad person.

#4. It is impossible to unsign a contract, so do all your thinking before you sign. Better yet, never sign anything in business.

#5. It is easier to stay out of trouble than it is to get out trouble.

#6. You should invest like a Catholic marries - for life.

#7. Happiness does not buy you money.

#8. Wall street is the only place where people ride to work in Rolls-Royce to get advice from those who take the subway.

#9. It takes twenty years to build a reputation and five minutes to lose it.

#10. The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.

#11. Don't try and step over 7 foot bars - look around for one foot bars to step over.

#12. Marrying for money is probably a bad idea under any circumstances, but it is absolutely nuts if you are already rich.

#13. It is not necessary to do extraordinary things to get extraordinary results.

#14. My idea of a group decision is to look in the mirror

#15. If we can make money in a $5 trillion U.S. market, it may be a little bit of wishful thinking to think we should get a few thousand miles offshore to start showing our stuff.

#16. Invest in a business that even a fool can run, because someday a fool will.

#17. Anything that can't go on forever will end

#18. Turnarounds seldom turn (see our chapter on buying a business)

#19. Managing your career is like investing -- the degree of difficulty does not count - so you can save yourself money and pain by getting on the right train.

#20. In a tough business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen.

WB

April 6, 2011 - PR, News Agency Example

PR - Journalism - News Agency Example ***

April 6, 2011 - E Commerce

(From Chapter 9)

In Groups

1. What are the ten myths of e-commerce?

2. Describe privacy issues related to e-commerce?

3. Describe four strategies for e-success.

4. What is an SEO strategy and why is this important? Is it akin to always trying to name your business with an "A" because that will be the first place folks look to in the phone book?

5. How important is designing a killer web site?
(i.e., is blog spot a good idea)

Tuesday, March 29, 2011

March 30, 2011 - ASN/Shipping Manifest

The ASC ship notice/manifest (commonly known as the advance shipping
notice or ASN) is primarily an electronic version of the packing slip. However, instead of being received with the shipment, the ASN is transmitted at the time the shipment is released by the supplier to the Transportation Company. When the ASN and purchase order acknowledgement are used together, there is no need to provide supersession, obsolescence, or quantity rounding exception information via paper documents.

In general, only the following types of information will be included on the ASN:

- product information -- shipped, backordered, or cancelled quantities, and the
disposition of remainders;

- purchase order reference for each specified part;

- shipment physical characteristics -- weight, number of boxes; and,

- shipment information -- date shipped, expected arrival date, shipping mode, and
transportation company used.

Ideally, the distributor should integrate the electronic receipt of the ASN into his existing computerized receiving function. For instance, the following combination of manual and automated procedures might be used:

1. The supplier generates and transmits the ASN, assigning a shipment number.
2. The distributor receives the electronic transmission, verifies that the referenced
purchase orders are valid, and stores it according to the shipment number.
a. If critical parts ordered are not contained in the shipment, the distributor might
immediately begin finding alternative sources.
b. If the shipment is large or is expected to arrive on the same day as other
shipments, thereby causing an overload of receiving operations, the distributor might schedule additional receiving dock personnel or prioritize processing of shipments based on need for the parts in transit.

March 30, 2011 - Sample Invoice

Invoice: Key - Price & Quantity/Terms
If services - professional services rendered.

*** Note on products - do we need to collect sales tax? What if you're wholesale and not retail? When do we collect tax - and when are we exempt re trading goods?

Sample Invoice

Cypress Technologies
Suite 7, 77 Marwood Place
Crestwood, B.C., V6T 7Q7
1-888-888-888

Sarah's Computer Bin
8424 Business Plaza
Vancouver, B.C., V9W 2T2

Att'n: Sarah Norgaard

INVOICE FOR:

1 HP OfficeJet Inkjet Color Printer $583.97
Sales TAX $29.20


TOTAL PAYABLE: $654.05



Invoice No. 754

Date of Invoice: Month Day, 2010

To be paid within 30 days of invoice date.

Monday, March 28, 2011

Wednesday, March 23, 2011

March 23, 2011 - Homework reading

Please read chapters 6 and 7 for next class.

March 23, 2011 - Marketing (small business)

Marketing

Art of Branding

In groups of 2 or 3, discuss:

1. Do you need to spend money on marketing/branding in your small business?
>>> If yes, how much - or how do you control costs for marketing services?

2. On a scale of 1 to 10 - where would you rank the importance of "marketing" in your business?

3. Can sales reps do the marketing and branding for you?
(sales reps create their own catalog sheets, et al)

4. Regarding "create a contagion" - to what degree do you feel the following is important to your business:

Cool

Effective

Distinctive

Disruptive

Emotive

Deep

Indulgent

Supported


* * *

Recruit Evangelists

* * *

March 23, 2011 - Key Terms

Key Terms

Demurrage

Distressed load

Bill of lading (i.e, the B.L's) * * * controls

Load/weight optimization

PHYTOSANITARY CERTIFICATION

http://www.state.sd.us/doa/das/phyto.html

March 23, 2011 - Art of Pitching

Art of Pitching

Explain yourself in first minute (think about your catalog sheet) * * * can the account understand what is going on in the first minute?


[investor pitch - we're not borrowing any money]

* * * THE PITCH

Manage for cash flow, not profitability * * *
KEY: however, work toward salary on 1040, not "investment income" (more on this in class);

Build bottom up forecast

SHIP THEN TEST (i.e., beta test on Amazon or E-bay)

>>>>> Start as a service business, then grow to mfg.

Function not form
Pick your battles

Go direct
>>> position against the leader

March 23, 2011 - Never Worry About Your Competition

“Never worry about your competition” lecture – we will form teams and have a lively debate over this concept. Then, in-depth lecture and group activity lab over government contracting – and the role using and leveraging government cash contracts play in start-up and entrepreneurship.

*** Disclose everything discussion (personal v. business); and, note why the no doc programs came about. Also, if you can't make any money yourself, then be sure to advise others how to invest theirs. I want to make a personal note on the cash hold position and why cash is king. Even if you're holding cash at $100.00, you still have the 100.00 versus giving a percentage away to manage it, you're already in the hole; and, should your investment go down - then . . . . there are a number of problems with "investment managers" and we will go over the problems dealing with the "50/50" game - telling 50 investors stocks go up, then 50 they go down - you've made 50 people money, right? - and continue to grow your crop of investors through that system - bring on another 100 and do it again. Why would you ever trust anybody to handle your money other than yourself? Do you agree, all the saints are in heaven when it comes to business? Therefore, is it a logical conclusion that if you want to be in business, you must only look out for yourself? Or, the free enterprise system will eliminate you by "natural selection"?

March 23, 2011 - EPP Due

The EPP paper is due this evening.

Friday, March 18, 2011

March 19, 2011 - Compilation Paper - Business Project

Compilation Paper - Business Project (update)

Key Elements of the Business Project:

* * * This is an example * * *

Page 1 - Name (dba), mission statement, date, et al.
Page 2 - TOC
Page 3 - Overview of the firm * et al.
Page 4 - Catalog Sheet
Page 5 - Price Sheet
Page 6 to 9 - Bill of Lading (if applicable); sales agreements, * * * PO, invoice, ASN, freight considerations, file system, lease/buy, where is your office, et al.
Page 10 - Conclusion

Merge the compilation paper, with the business project and in a minimum of six (6) pages reflect on the course and what you have learned, et al. Please make sure and reference the text (cite per APA). This is a creative opportunity to integrate the course material and class discussions with your business plan. I would encourage debate and discourse in the paper about vertical/horizontal integration, detached management, competition, cash only, et al.

* * * We will discuss in class * * *

March 19, 2011 - EPP, Mr. Vandersloot

Review the following from Mr. Vandersloot re EPP:

http://www.inc.com/magazine/20041015/hidi-vandersloot.html

Avon ladies. Tupperware parties. Pyramid schemes. That's what most people think of when they hear "direct-marketing company of home and health care products." Frank VanderSloot has changed those perceptions. His Idaho-based company, Melaleuca, which manufactures and distributes natural products ranging from shampoo to vitamins to tile cleaner, has reinvented the direct-marketing model, beginning by dialing back the sales pressure. The company's five-year run on the Inc. 500 began in 1990, and last year Melaleuca had revenue of $546 million. Melaleuca's marketing executives, as the salespeople are called, earn anywhere from a few hundred dollars a year to, in a few rare cases, as much as $1.75 million annually.

Melaleuca began out of the ashes of a previous company. In 1985, I became CEO of Oil of Melaleuca, a multilevel marketing firm selling products based on melaleuca oil. This oil, distilled from the leaves of the melaleuca tree in Australia, has natural antiseptic, fungicidal, and analgesic properties. And it has a history: Australians used it in first-aid kits during World War II for minor skin conditions, abrasions, and insect bites. The idea was to take the oil and put it into cosmetics.

I hadn't done my due diligence on the company before I got there. The business was full of problems. Like most multilevel companies, commissions and revenue were based on the idea of getting people to set up a business selling the product to consumers. One guy tries to set the next guy up. That guy tries to set up the next guy. They make commissions by pushing large amounts of inventory.

I quickly learned the major problem with that business model: Not a lot of product gets to the end consumer. It looked like the company was bringing in a lot of money, but it was mostly revenue from starter kits sold to folks setting up their business.

We had all kinds of other problems as well. A lot of our distributors were making claims in regard to what melaleuca oil could do that were not substantiated with good science. Plus, the family that had started the company had invested in a ranch where it had been told 80% of all the melaleuca trees in the world stood. Not true. Maybe only 5% of the world's melaleuca trees were on this ranch.

I've learned that the bleakest of times is often the best opportunity. One of my first determinations as CEO was that we had to close the company. I went to the owners of the company, and I told them we could rebuild if we ditched the current business model and started over. I wanted to get as far away as possible from multilevel marketing. I also told them that I wanted to be a partner in the business. They said, "Okay, but you've got to invest what we invested." That was basically my life savings.

I learned a whole lot in the next five months. I learned that there are a lot of folks out there who want naturally oriented products that aren't based on wives' tales or folklore. They want scientifically documented products that really work. I also learned that there were a lot of people looking to make it on their own. It's really tough to start your own business. Forty years ago you could start a hamburger stand and sell a better hamburger, but you can't do it today. So my goal was to come up with a business model that not only would market good natural products, but would also help set people up in business without all the regulations.

We rolled out an entirely new business model and product line on September 1, 1985. We sold more than just melaleuca oil; we had other naturally oriented products, like a line of cleaning products. I told our distributors, "We're not going to be operating in that multilevel-marketing deal you guys were interested in. It's not going to be a get-rich-quick program." No one was going to be selling inventories to people, so there would be no incentive to load people with product.

We lost half of our distributors. Our first month's sales were $75,000. The first three or four years, we didn't grow very much, partially because we were still trying to communicate our business model to the masses. But after our fifth year, we made the Inc. 500.

In the beginning I used to write all the catalogs, all the sales literature, all the brochures. Now a lot of things have improved, starting with our literature. But it's essentially the same concept -- the distribution model has worked since the first day. When a customer goes online or calls in to place an order with us, the person who gave him that catalog will get a commission. No one is knocking on his door. He didn't come to a party where he was pressured into buying or selling something. And we save money because we don't do any advertising and we ship right from our factory to people's homes.

Let's say you've got an independent marketing person and he's out representing your products and having a whole lot of success. But you learn that he's doing it in a way that isn't quite ethical, or is exaggerating the viability of the product. Some companies may be tempted to say, "Well, wait, look how much business he's bringing us. We'll take the risk. Maybe we won't get in trouble. We don't want to tap him on the shoulder and say, 'You can't do this." We've never shied from that. If somebody does that it risks our entire business, our entire reputation. I don't care how much money you bring in, if you're doing it the wrong way, we're not going to let it happen.

I love Corporate America, but it's not necessarily fair. When I see people who are struggling financially, I want to help those folks out. My family didn't have much money growing up. We shopped at St. Vincent de Paul and Goodwill stores. We've tried to design a business model for those people who want to supplement their income because they would like to make some extra money or because they are in debt up to their eyeballs. Something like 190,000 people earn a check from Melaleuca each month. About 20,000 of them make their primary living through the company.

The best advice I can give is that bad news doesn't always equal bad results. If the original company, Oil of Melaleuca, had been even a marginal success then we wouldn't have been tempted to plow ahead. It's just because Oil of Melaleuca was such a disaster that Melaleuca has become a success. If something isn't working, don't be afraid to plow it under and start over.

* * *

http://www.theaimcompanies.com/

* * *

March 19, 2011 - Operating Agreement (Class Example)

Operating Agreement (Class Example)

Class Example


OPERATING AGREEMENT

of

_____________________ LLC

Dated Effective: _____________ __, 2010



TABLE OF CONTENTS
(The Table of Contents for this operating agreement is for convenience of reference only and is not intended to define, limit or describe the scope or intent of any provisions of this operating agreement.)

ARTICLE 1. FORMATION 1
1.1. Name. 1
1.2. Articles of Organization. 1
1.3. Principal Place of Business. 1
1.4. Registered Office and Registered Agent. 1
1.5. Business Purpose. 1
1.6. Agreement. 1
ARTICLE 2. MEMBERS, CONTRIBUTIONS, AND INTERESTS 2
2.1. Names; Addresses; Capital Contributions; Membership Interests. 2
2.2. Limitation of Liability. 2
2.3. No Liability for Company Debts. 2
2.4. No Member Authority. 2
2.5. Other Business of Members. 2
2.6. Additional Members. 2
2.7. Additional Contributions. 3
2.8. No Interest on Capital Contributions. 3
2.9. Loans; Guaranties. 3
ARTICLE 3. MEMBER MEETINGS 3
3.1. Meetings. 3
3.2. Notice of Meeting. 4
3.3. Record Date. 4
3.4. Quorum. 4
3.5. Proxies. 4
3.6. Voting. 4
ARTICLE 4. MANAGEMENT 4
4.1. Number and Qualifications of Managers. 4
4.2. Election of Managers. 4
4.3. General Authority. 4
4.4. Other Activities. 4
4.5. Meetings; Notices: Quorum; Voting. 5
4.6. Resignation. 5
4.7. Removal of Manager by Members. 5
4.8. Salaries. 5
4.9. Other Agents. 5
4.10. Employment of Members or Affiliates. 5
4.11. Tax Matters. 5
ARTICLE 5. ACTIONS WITHOUT NOTICE, WITHOUT MEETING OR BY TELEPHONE 6
5.1. Meeting of all Members or Managers. 6
5.2. Action Without Meeting. 6
5.3. Meetings by Telephone. 6
ARTICLE 6. ACCOUNTING AND RECORDS 6
6.1. Books of Account. 6
6.2. Fiscal Year. 6
6.3. Accounting Reports. 6
6.4. Tax Returns. 6
6.5. Taxes of Taxing Jurisdictions. 7
6.6. Tax Matters Partner. 7
ARTICLE 7. ALLOCATIONS AND DISTRIBUTIONS 7
7.1. Allocations Generally. 7
7.2. Allocations of Income from Sales. 7
7.3. Distributions. 7
7.4. Distribution of Cash from Operations. 7
7.5. Distributions Upon Sale of Assets. 7
7.6. Shared Priorities. 8
7.7. Capital Accounts. 8
7.8. Compliance with Section 704. 8
7.9. Priority and Return of Capital. 8
ARTICLE 8. TRANSFERS OF MEMBERSHIP INTERESTS 8
8.1. Restriction on Disposition. 8
8.2. Prohibited Transfers. 9
8.3. Option to Purchase on Bankruptcy or Withdrawal. 9
8.4. Admission of Assignees as Members. 10
8.5. Rights of Unadmitted Assignees. 10
ARTICLE 9. WITHDRAWAL AND DISSOLUTION 10
9.1. No Withdrawal. 11
9.2. Events of Dissolution. 11
9.3. Effect of Death of a Member. 11
9.4. Liquidation Upon Dissolution and Winding Up. 11
9.5. Valuation of Member's Interest. 11
9.6. Effect of Purchase of Member's Interest. 11
ARTICLE 10. INDEMNIFICATION 11
10.1. Indemnification. 12
10.2. Limitation of Liability. 12
ARTICLE 11. AMENDMENTS 12
11.1. By Members. 12
11.2. By Managers. 12
ARTICLE 12. MISCELLANEOUS 12
12.1. Additional Documents. 12
12.2. Headings. 12
12.3. Severability. 12
12.4. No Third Party Beneficiaries. 12
12.5. No Partnership Intended for Nontax Purposes. 13
12.6. Partnership Intended for Tax Purposes. 13
12.7. Binding Effect. 13
12.8. Construction. 13
12.9. Time. 13
12.10. Governing Law. 13
12.11. Waiver of Action for Partition; No Bill for Partnership Accounting. 13
12.12. Counterpart Execution. 13
12.13. Specific Performance. 13
12.14. Notice. 14
12.15. Rights and Remedies Cumulative. 14
12.16. Waivers. 14
12.17. Attorney Fees. 14


OPERATING AGREEMENT OF ___________________ LLC
an Idaho Limited Liability Company

The undersigned members, desiring to form a limited liability company under the Idaho Limited Liability Company Act (the "Act"), hereby agree as follows:

ARTICLE 1. FORMATION

1.1. Name. The name of the limited liability company is __________________ LLC (the “LLC”).
1.2. Articles of Organization. Articles of organization were filed with the Idaho Secretary of State on __________ __, 2004.
1.3. Principal Place of Business. The principal office of the LLC shall initially be at . The managers may relocate the principal office or establish additional offices from time to time.

1.4. Registered Office and Registered Agent. The LLC's initial registered office shall be at , Idaho 83714, and the name of its initial registered agent at such address shall be . The members may change the registered office and registered agent from time to time.

1.5. Business Purpose. The purpose of the LLC shall be to purchase, own, develop, build and construct commercial real estate, own, manage, lease and operate commercial, retail, and other real estate and other business establishments on that certain real property more particularly described in Exhibit A, attached hereto and incorporated herein (the “Property”), and to engage in any other lawful business.

1.6. Agreement. The members executing the operating agreement hereby agree to the terms and conditions of the operating agreement, as it may from time to time be amended according to its terms. To the extent any provision of the operating agreement is prohibited or ineffective under the Act, the operating agreement shall be considered amended to the smallest degree possible in order to make the agreement effective under the Act. In the event the Act is subsequently amended or interpreted in such a way to make any provision of the operating agreement that was formerly invalid valid, such provision shall be considered to be valid from the effective date of such interpretation or amendment.

ARTICLE 2. MEMBERS, CONTRIBUTIONS, AND INTERESTS

2.1. Names; Addresses; Capital Contributions; Membership Interests. The names and addresses of the members of the LLC and their initial capital contribution and membership interests are as set forth below:

Name and address Agreed Value Membership Interest
Capital Contribution

Land valued at
$___/square foot




2.2. Limitation of Liability. Each member's liability shall be limited to the maximum extent permitted by applicable law. The failure of the LLC to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs shall not be grounds for imposing personal liability on the members or managers for liabilities of the LLC.

2.3. No Liability for Company Debts. Except as otherwise expressly required by Idaho law, the debts, obligations and liabilities of the LLC, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the LLC, and no member shall be obligated personally for any such debt, obligation or liability of the LLC solely by reason of being a member. Except as otherwise expressly required by this operating agreement or by Idaho law, the liability of each member shall be limited to the amount of capital contributions, if any, required to be made by such member in accordance with this operating agreement, but only when and to the extent the same shall become due pursuant to the provisions of this operating agreement.

2.4. No Member Authority. No member shall have any power or authority to contract on behalf of the LLC or otherwise bind the LLC unless the member has been given written authorization from the managers to act as an agent of the LLC.
2.5. Other Business of Members. Any member may engage independently or with others in other business and investment ventures of every nature and description, even if such business is competitive with the business of the LLC, and shall have no obligation to account to the LLC for such business or investments or for business or investment opportunities.

2.6. Additional Members. No additional members shall be admitted without the unanimous consent of the managers, except that such consent is not required to admit a deceased member's spouse, estate or other beneficiary as a member in place of the deceased member.

2.7. Additional Contributions. Except as set forth in this Section 2.7, no member shall be required or permitted to make any additional capital contributions. In the event that at any time, pursuant to the vote of the managers, the managers determine that additional funds in excess of the capital contributions are required by the LLC for its business or any of its obligations, expenses, costs, liabilities or expenditures, or for improvements with respect to any LLC property, the members shall be required to contribute such additional funds in proportion to their percentage interests.

In the event, after being notified to do so, a member ("defaulting member") fails to contribute additional funds as required herein, the other members who have made their required contributions ("non-defaulting members") may contribute the additional funds needed pro rata based upon their percentage interests, in which case the advance shall be deemed a demand loan by the non-defaulting member or members to the defaulting member bearing interest at the rate of twelve (12) percent per annum from the date the advance is made. The non-defaulting members and the LLC shall have any and all other remedies available at law or in equity against the defaulting members, in addition to the opportunity to advance funds to the LLC as a demand loan to the defaulting member as described above. To the extent of such advance plus interest, any distributions otherwise due to the defaulting member shall instead be paid to the non-defaulting member or members (pro rata with the amounts advanced by each non defaulting member) who made such contribution. The defaulting member may again receive distributions after all defaults are cured, and any loans to non-defaulting members are repaid in full.

2.8. No Interest on Capital Contributions. Except as otherwise provided herein, no interest shall be paid on capital contributions.

2.9. Loans; Guaranties. The LLC may borrow money from any member or third parties upon such commercially reasonable terms and conditions as may be approved by the managers. The members acknowledge that in order to obtain third-party financing for the operation of the LLC, the members, or principals of the members, may be required by third-party lenders to execute guarantees for such financing (each a “Guarantor”). With regard to any and all obligations arising from or related to any guarantee of any loan to the LLC (a “Guarantee Obligation”), the members hereby agree that if any Guarantor is obligated to satisfy any Guarantee Obligation, such Guarantor shall have a right of contribution against the other members to the extent of each member’s respective Membership Interest. In addition, each member hereby agrees to indemnify and hold the other members harmless from any claim, costs, damages or expenses, including attorneys fees, incurred with regard to any Guarantee Obligation in excess of each indemnified member’s Membership Interest. The rights of indemnification and contribution provided herein are in addition to any additional rights or remedies provided by law, or by any other agreement among the members, and shall include all costs and expenses, including attorneys fees and interest, incurred by a member in enforcing the terms hereof and/or with regard to any such claim.

ARTICLE 3. MEMBER MEETINGS

3.1. Meetings. A meeting of members shall be held (a) if it is called by the managers; or (b) if members holding at least twenty-five percent (25%) of the membership interests sign, date, and deliver to the LLC's principal office a written request for the meeting, describing the purpose or purposes for which it is to be held. Meetings of members shall be held at the principal office of the LLC or any other place specified in the notice of meeting.

3.2. Notice of Meeting. Notice of the date, time, and place of each members' meeting shall be given to each member not more than sixty (60) days nor less than ten (10) days before the meeting date. The notice must include a description of the purpose or purposes for which the meeting is called.

3.3. Record Date. The persons entitled to notice of and to vote at a members' meeting, and their respective membership interests, shall be determined as of the record date for the meeting. The record date shall be a date, not more than seventy (70) days nor less than ten (10) days before the meeting, selected by the managers. If the managers do not specify a record date, the record date shall be the date on which notice of the meeting was first mailed or otherwise delivered.

3.4. Quorum. The presence, in person or by proxy, of members holding at least sixty six percent (66%) of the membership interests shall constitute a quorum.

3.5. Proxies. A member may be represented at a meeting in person or by written proxy.

3.6. Voting. Each member shall be entitled to a vote based on the member's membership interest in the LLC on each matter requiring action by the members. Except as otherwise stated in the articles of organization, this operating agreement, or applicable law, a matter submitted to a vote of the members shall be deemed approved if the membership interests voted in favor exceed those voted against the matter.

ARTICLE 4. MANAGEMENT

4.1. Number and Qualifications of Managers. As provided in the articles of organization, the LLC shall be managed by managers. The number of managers shall be the number elected by the members and acting as such from time to time, but shall not be less than one (1). Managers may be individuals or entities, and need not be members of the LLC. The initial manager shall be .

4.2. Election of Managers. If an initial manager resigns, the office of manager shall be filled by election at a meeting of members called for the purpose of electing managers; the meeting notice must state that the purpose, or one of the purposes, of the meeting is election of managers. A manager other than the initial manager shall serve for a term ending when the members next hold a meeting at which managers are elected, or until the manager's earlier death, resignation, or removal.

4.3. General Authority. Subject to restrictions that may be imposed from time to time by the managers or members, any manager shall be an agent of the LLC with authority to contract on behalf of the LLC or to otherwise bind the LLC in the ordinary course of its business. Except as otherwise provided in this operating agreement, if there is more than one (1) manager, all actions shall require the vote and consent of a majority of the managers, and upon such consent, all documents shall require the signature of one (1) manager before such signature shall be effective.

4.4. Other Activities. Managers may have other business interests and may engage in other activities in addition to those relating to the LLC even if those activities are competitive with the business of the LLC. This Section does not change a manager's duty to act in a manner that such manager reasonably believes to be in the best interests of the LLC.

4.5. Meetings; Notices: Quorum; Voting. In the event there is more than one (1) manager, meetings of the managers may be called by any manager. Meetings shall be held at the place fixed by the managers or, if no such place has been fixed, at the principal office of the LLC. Oral or written notice of the date, time, and place of any meeting shall be given at least twenty-four (24) hours in advance. Written notice may be delivered personally, given by facsimile or other form of wire communication, or by mail or private carrier, to each manager's business or home address. Written notice shall be effective at the earliest of the following: (a) when received, (b) when sent by facsimile or other form of wire communication, or (c) two business days after being mailed. A majority of the managers shall be required to constitute a quorum. Each manager shall be entitled to one vote. The matter submitted to a vote of the managers shall be deemed approved if a majority of the votes are cast in favor of the matter.

4.6. Resignation. A manager may resign at any time by delivering written notice to the members. The resignation is effective upon notice, unless the notice specifies a later effective date. Once delivered, a notice of resignation is irrevocable unless revocation is permitted by the members. The resignation of a manager who is also a member shall not affect the manager's rights as a member and shall not constitute a withdrawal of the member.

4.7. Removal of Manager by Members. The members may remove one or more managers with cause. A manager may be removed by the members only at a meeting called for the purpose of removing the manager and the meeting notice must state that the purpose, or one of the purposes, of the meeting is the removal of the manager.

4.8. Salaries. Managers may receive a salary or other compensation for services rendered to or on behalf of the LLC if approved by the members. A manager shall not be precluded from receiving a salary because the manager is also a member. Managers shall be reimbursed for out-of-pocket expenses incurred in performing their duties as managers of the LLC. Notwithstanding the foregoing, no compensation shall be paid at the time of execution hereof unless otherwise agreed by the members.

4.9. Other Agents. The managers may authorize any agent to enter into any lawful contract or to otherwise act on behalf of the LLC. Such authority may be general or be confined to specific instances.

4.10. Employment of Members or Affiliates. The manager may retain, employ, sell or lease any services of the members or affiliates of the members to the LLC, provided that such transaction is made on terms and conditions which are no less favorable to the LLC than if such transaction had been entered into with an independent third party, and such transaction is approved by the LLC. The members acknowledge and agree that shall provide construction services to the LLC on the terms and conditions set forth in that certain Development and Construction Agreement by and between the LLC and .

4.11. Tax Matters. Except as otherwise specifically provided herein or prohibited by law, the managers shall make any and all elections for federal and state income tax purposes, including, without limitation, any election, if permitted by applicable law to: i) adjust the basis of LLC property pursuant to Code '754, '734(b), and '743(b), or comparable provisions of state or local law, in connection with transfers of membership interests and LLC distributions; ii) extend the statute of limitations for assessment of tax deficiencies against members with respect to adjustments to the LLC's federal, state or local tax returns; and iii) represent the LLC before taxing authorities or courts of competent jurisdiction in tax matters affecting the LLC.

ARTICLE 5. ACTIONS WITHOUT NOTICE, WITHOUT MEETING OR BY TELEPHONE

5.1. Meeting of all Members or Managers. Notwithstanding any other provision of this operating agreement, if all of the members or all of the managers shall hold a meeting at any time and place, such meeting shall be valid without call or notice, and any lawful action taken at such meeting shall be the action of the members or managers, as the case may be.

5.2. Action Without Meeting. Any action required or permitted to be taken by the members or managers at a meeting may be taken without a meeting if a consent in writing, describing the action taken, is signed by all of the members or managers and is included in the minutes or filed with the LLC's records of meetings.

5.3. Meetings by Telephone. Meetings of the members or managers may be held by conference telephone or by any other means of communication by which all participants can hear each other simultaneously during the meeting, and such participation shall constitute presence in person at the meeting.

ARTICLE 6. ACCOUNTING AND RECORDS

6.1. Books of Account. The LLC's books and records, a register showing the names, addresses, and membership interests of the members, and this operating agreement shall be maintained by. Each manager and each member shall have access thereto at all reasonable times. shall keep books and records of the operation of the LLC which are appropriate and adequate for the LLC's business and for the carrying out of this agreement. A separate checking account will be opened for the LLC, and all records will be made available for all members as requested.

6.2. Fiscal Year. The fiscal year of the LLC shall be the calendar year.

6.3. Accounting Reports. At the end of each quarter, shall provide the members with quarterly financial reports of the activities of the LLC for the preceding quarter. Within 90 days after the close of each fiscal year, the manager shall cause each member to receive an unaudited report of the activities of the LLC for the preceding fiscal year, including a copy of a balance sheet of the LLC as of the end of such year and a statement of income or loss for such year.

6.4. Tax Returns. The manager shall cause all required federal and state income tax returns for the LLC to be prepared and timely filed with the appropriate authorities. Within 90 days after the end of each fiscal year, each member shall be furnished a statement suitable for use in the preparation of the member's income tax return, showing the amounts of any distributions, contributions, gains, losses, profits, or credits allocated to the member during such fiscal year.

6.5. Taxes of Taxing Jurisdictions. Each non-resident member of Idaho acknowledges that Idaho claims taxing jurisdiction over such member through such member's membership interest in the LLC. Such non-resident members shall make timely income tax payments to Idaho for income taxes attributable to the member's income, and interest, and penalties assessed by Idaho on such income. If the member fails to make such timely payments, or if the member so elects, the LLC shall withhold and pay over to Idaho the amount of tax, penalty and interest determined under the laws of Idaho with respect to such income. Any such payments made to Idaho with respect to the income of a member shall be treated as a distribution for purposes of Article 7. In addition, the LLC may, where permitted by the rules of any taxing jurisdiction, file a composite, combined or aggregate tax return reflecting the income of the LLC and pay the tax, interest and penalties of some or all of the members on such income to the taxing jurisdiction, in which case the LLC shall inform the members of the amount of such tax, interest and penalties so paid.
6.6. Tax Matters Partner. The manager shall be designated to act as the tax matters partner of the LLC pursuant to '6231(a)(7) of the Internal Revenue Code. Any member designated as tax matters partner shall take such action as may be necessary to cause each other member to become a notice partner within the meaning of '6223 of the Code. Any member who is designated tax matter partner may not take any action contemplated by ''6222 through 6232 of the Internal Revenue Code without the consent of the members.

ARTICLE 7. ALLOCATIONS AND DISTRIBUTIONS

7.1. Allocations Generally. Except as otherwise provided in this operating agreement, all items of income, gain, loss, deduction, and credit of the LLC shall be allocated among all members in proportion to their membership interests.
7.2. Allocations of Income from Sales. All gain attributable to a sale of all or a portion of the Property shall be allocated to the members in accordance with the distribution percentages set forth in Section 7.5.

7.3. Distributions. The LLC shall make distributions in such amounts and at such times as the manager shall determine in such manager’s discretion; provided, however, distributions of the LLC’s cash available for distribution shall occur at least annually at the end of the fiscal year.

7.4. Distribution of Cash from Operations. Distributions of the LLC’s cash available for distribution shall be made in the following order of priority:

7.4.1. Any cash available for distribution shall be distributed to the members until the members have received cash distributions which are returns of capital for the full value of the members= cash or agreed value contribution; and

7.4.2. Any cash available for distribution remaining after satisfaction of the return of capital shall be distributed to the members in proportion to their respective Membership Interests.

7.5. Distributions Upon Sale of Assets.

Upon the sale of all or any portion of the Property, the LLC’s proceeds from the sale shall be made in the following order of priority:

7.5.1. First, to pay off the balance of any construction financing for construction of any improvements on that portion of the Property sold;

7.5.2. Second, to the members until the members have received cash distributions which are returns of capital for the full value of the members’ cash or agreed value contributions; and

7.5.3. Third, to the members in accordance with their respective Membership Interests.

7.6. Shared Priorities. If there is more than one member who is entitled to the same priority of distribution and there is not enough cash available for distribution to cover all distributions in that priority category, the cash available for distribution shall be allocated and distributed to the members entitled to distribution within that priority category in the relationship which each of the member's respective claims in that priority category bear to the total claims of all members in that priority category.

7.7. Capital Accounts. An individual capital account shall be maintained for each member. Each member's capital account shall be (i) credited with all capital contributions by such member and the member's distributive share of all income and gain (including any income exempt from federal income tax); and (ii) charged with the amount of all distributions to such member and the member's distributive share of losses and deductions. Capital accounts shall be maintained in accordance with federal income tax accounting principles as set forth in Treas. Reg. 1.704 l(b)(2)(iv) or any successor provision.

7.8. Compliance with Section 704. The provisions of this Article 7 as they relate to the maintenance of capital accounts are intended, and shall be construed, and, if necessary, modified to cause the allocations of profits, losses, income, gain and credit pursuant to Article 7 to have substantial economic effect under the Regulations promulgated under '' 704(b) and 704(c) of the Code, in light of the distributions made pursuant to Articles 7 and 9 and the capital contributions made pursuant to Article 2.

7.9. Priority and Return of Capital. Except as may be expressly provided in Article 7, no member shall have priority over any other member, either as to the return of capital contributions or as to profits, losses, or distributions; provided that this Section shall not apply to loans (as distinguished from capital contributions) which a member has made to the LLC.

ARTICLE 8. TRANSFERS OF MEMBERSHIP INTERESTS

8.1. Restriction on Disposition. No member or assignee shall transfer, sell, gift, encumber, hypothecate, exchange or otherwise dispose of all or any portion of his membership interest without the express written consent of the remaining members, except as provided in this Section 8.1 or Section 8.3. The written consent of the members is not required to admit a deceased member's spouse, estate, devisee, heir or other beneficiary as a member. Each member hereby acknowledges the reasonableness of the restrictions on disposition imposed by this operating agreement in view of the LLC purposes and the relationship of the members. Accordingly, the restrictions on disposition contained herein shall be specifically enforceable.

8.2. Prohibited Transfers. Any purported transfer of all or any portion of a membership interest that does not satisfy the requirements of Section 8.1 or Section 8.3 shall be null and void and of no force or effect whatever; provided that, if the LLC is required to recognize a transfer that does not meet such requirements (or if the LLC, in its sole discretion, elects to recognize a transfer that does not satisfy such requirements), the membership interest transferred shall be strictly limited to the transferor's economic rights with respect to the transferred membership interests, which economic rights may be applied (without limiting any other legal or equitable rights of the LLC) to satisfy any debts, obligations, or liabilities for damages that the transferor or assignee of such membership interests may have to the LLC. In the case of a transfer or attempted transfer of membership interests that does not satisfy such requirements, the parties engaging or attempting to engage in such transfer shall indemnify, defend and hold harmless the LLC and the other members from all cost, liability, and damage that any of such indemnified persons may incur (including, without limitation, incremental tax liability and lawyers' fees and expenses) as a result of such transfer or attempted transfer and efforts to enforce the indemnity granted hereby.

8.3. Option to Purchase on Bankruptcy or Withdrawal. Upon the bankruptcy or withdrawal of a member (a "Triggering Event"), the LLC shall have the first option to purchase the membership interest subject to the Triggering Event. If the LLC exercises such option with respect to less than all of the membership interest, then the remaining members shall have the second option to purchase the remaining portion of such membership interest based upon the relative percentage interest owned by such member and the remaining members electing to purchase the membership interest. If the remaining members exercise their option with respect to less than all of the membership interest, then the remaining members who have elected to purchase a portion of such membership interest shall have the third option to purchase the remaining portion of such membership interest. The LLC shall give notice to the members within a reasonable time after learning of the occurrence of a Triggering Event. The option shall be exercised as follows:

8.3.1. The LLC shall give notice to the members of its decision to purchase all or a portion of the membership interest by giving notice to the remaining members within thirty (30) days of receiving notice of the Triggering Event.

8.3.2. If the LLC exercises its option with respect to less than all of the membership interest, then each remaining member shall have the second option to purchase a portion of the remaining portion of the membership interest by giving notice to the members of his or her decision to exercise his or her option as to all or a portion of the membership interest he or she may purchase within sixty (60) days of receiving notice of the occurrence of a Triggering Event. Each member electing to purchase all or a portion of the membership interest shall purchase in proportion to the membership interests of the members electing to purchase, unless such members agree on another allocation of such purchased membership interest.
8.3.3. If the remaining members exercise their option with respect to less than all of the membership interest, then the members who have elected to purchase a portion of such membership interest shall have the third option to purchase the remaining portion of the membership interest, pro rata based on membership interests, by giving notice to the LLC and the remaining members within ninety (90) days of the Triggering Notice. If some members purchase portions of the membership interest and others do not, the purchasing members may purchase the unpurchased portion pro rata based upon the membership interests of the purchasing members.

8.3.4. The price to be paid for the membership interest shall be sixty five percent (65%) of the fair market value of the membership interest as determined under Section 9.5.

8.3.5. The closing of the sale of the membership interest shall occur on a date and time mutually convenient to the parties; provided that the closing date shall occur no later than the sixtieth (60th) day following the day that the last notice given in subsections 8.3.1, 8.3.2 or 8.3.3 above. On the closing date, the parties shall execute such documents and instruments of conveyance as may be necessary or appropriate to confirm the sale of the membership interest, the withdrawal of the selling member as a member as of the date of the retiring event, and the assumption by the LLC of all liabilities with respect to the LLC.

8.3.6. The payment for the membership interest shall be made in installments ("Installment Payments") as follows: ten percent (10%) of the price shall be paid on the closing date. The remainder of the price shall be paid in equal annual installments on the next five (5) consecutive anniversaries of the closing date. The unpaid portion of the price shall bear interest at the prime rate of U.S. Bank on the closing date. The remaining amount of the purchase price may be prepaid at any time.

8.3.7. In the event the options to purchase are exercised with respect to less than all of the membership interest, so that less than all of the membership interest is purchased in accordance with the terms of this Section 8.3, the option shall lapse and the remaining members shall be deemed to have given consent to the transfer to the representative of the bankrupt member, subject to the application of Article 9. The membership interest shall remain subject to all of the terms, covenants, conditions and restrictions of this operating agreement, including this option. During the period in which payments are being made, the former member shall have no rights as a member in the LLC.

8.4. Admission of Assignees as Members. Subject to the other provisions of this Article 8, an assignee of membership interests may be admitted to the LLC as a member only upon the vote of the remaining members and the satisfaction of such other terms and conditions as the manager shall require.

8.5. Rights of Unadmitted Assignees. A person who acquires one or more membership interests but who is not admitted as a member pursuant to this Article 8 shall be entitled only to the economic rights with respect to such transferred membership interests in accordance with this operating agreement, and shall have no right to vote on any matters as a member, shall have no right to any information or accounting of the affairs of the LLC, shall not be entitled to inspect the books or records of the LLC, and shall not have any of the rights of a member under the Act or this operating agreement.

ARTICLE 9. WITHDRAWAL AND DISSOLUTION

9.1. No Withdrawal. Each member agrees not to withdraw from the LLC without the consent of two-thirds of the other members. A voluntary withdrawal in violation of this Section shall be effective after ninety (90) days written notice delivered to the manager, but such withdrawal shall constitute a breach of this operating agreement for which the LLC and other members shall have the remedies provided under applicable law or in equity. Upon such withdrawal, the member shall be required to offer its membership interest to the LLC and the other members pursuant to Section 8.3.
9.2. Events of Dissolution. Except as otherwise provided in this operating agreement, the LLC shall dissolve upon the earlier of: (a) the time for dissolution specified in the articles of organization; or (b) the approval of dissolution by a vote of the members.
9.3. Effect of Death of a Member. In the event of the death of a member, then the deceased member’s spouse, estate, devisee, heir or other beneficiary shall be admitted as a member.
9.4. Liquidation Upon Dissolution and Winding Up. Upon the dissolution of the LLC, the manager shall wind up the affairs of the LLC. A full account of the assets and liabilities of the LLC shall be taken. The assets shall be promptly liquidated and the proceeds distributed as follows:
9.4.1. First, to the payment and discharge of all of the LLC's debts and liabilities to creditors other than members;
9.4.2. Second, to the payment and discharge of all of the LLC's debts and liabilities to members;
9.4.3. Third, to the members to repay their cash or agreed value capital contributions;
9.4.4. The balance, if any, to the members in accordance with their capital accounts after giving effect to all contributions, distributions, and allocations for all periods.
With approval by vote of the members, the LLC may, in the process of winding up the LLC, elect to distribute certain property in kind.
9.5. Valuation of Member's Interest. Upon an election by the LLC to purchase the interest of a member pursuant to Section 8.3, within a reasonable time of the Triggering Event and the requirement for an appraisal, the LLC shall pay for an appraisal of the membership interest being purchased. Such appraisal shall be made by an MAI certified appraiser. The appraisal shall be completed within a reasonable time and shall constitute the basis for the price of the membership interest under Section 8.3.

9.6. Effect of Purchase of Member's Interest. A member shall cease to be a member upon the LLC's election to purchase the member's interest pursuant to Section 9.3 or 9.4. During the period in which the LLC is making payments, the former member shall have no rights as a member in the LLC.

ARTICLE 10. INDEMNIFICATION

10.1. Indemnification. The LLC shall indemnify each of its managers to the fullest extent permissible under Idaho law, as the same exists or may hereafter be amended, against all liability, loss and costs (including, without limitation, attorney fees) incurred or suffered by such person by reason of or arising from the fact that such person is or was a manager of the LLC, or is or was serving at the request of the LLC as a manager, director, officer, partner, trustee, employee, or agent of another foreign or domestic limited liability company, corporation, partnership, joint venture, trust, benefit plan, or other enterprise. The LLC may, by action of the members or managers, provide indemnification to employees and agents of the LLC who are not managers. The indemnification provided in this Section shall not be exclusive of any other rights to which any person may be entitled under any statute, bylaw, agreement, resolution of members or managers, contract, or otherwise.

10.2. Limitation of Liability. Managers of the LLC shall not be liable to the LLC or its members for monetary damages for conduct as managers except to the extent that the Act, as it now exists or may hereafter be amended, prohibits elimination or limitation of manager liability. No repeal or amendment of this Section or of the Act shall adversely affect any right or protection of a manager for actions or omissions prior to the repeal or amendment.

ARTICLE 11. AMENDMENTS

11.1. By Members. The members may amend or repeal the provisions of this operating agreement by majority vote set forth in writing or by action taken at a meeting of members called for that purpose, except that this operating agreement may not be amended adversely as to any member without the consent of such member. This operating agreement may not be amended or repealed by oral agreement of the members.
11.2. By Managers. The managers may amend or repeal the provisions of this operating agreement by majority vote set forth in writing or by action taken at a meeting of managers called for that purpose, except that this operating agreement may not be amended adversely as to any member without the consent of such member. This operating agreement may not be amended or repealed by oral agreement of the managers.
ARTICLE 12.
MISCELLANEOUS

12.1. Additional Documents. Each member shall execute such additional documents and take such actions as are reasonably requested by the managers in order to complete or confirm the transactions contemplated by this operating agreement.
12.2. Headings. Headings in this operating agreement are for convenience only and shall not affect its meaning.
12.3. Severability. The invalidity or unenforceability of any provision of this operating agreement shall not affect the validity or enforceability of the remaining provisions.
12.4. No Third Party Beneficiaries. The provisions of this operating agreement are intended solely for the benefit of the members and shall create no rights or obligations enforceable by any third party, including creditors of the LLC, except as otherwise provided by applicable law.
12.5. No Partnership Intended for Nontax Purposes. The members have formed the limited liability company under the Act, and expressly do not intend hereby to form a partnership under any Idaho statute. The members do not intend to be partners one to another, or partners as to any third party. To the extent any member, by word or action, represents to another person that any other member is a partner or that the limited liability company is a partnership, the member making such wrongful representation shall be liable to any other member who incurs personal liability by reason of such wrongful representation.
12.6. Partnership Intended for Tax Purposes. It is the express intention of the members that the LLC be treated as a partnership for purposes of federal and state taxation. The members agree to take such actions and make such elections as may be necessary or convenient to all the LLC to be treated as a partnership. If it is determined that the LLC is or will not be classified as a partnership under the Internal Revenue Code, then the operating agreement shall be considered amended to the smallest degree possible in whatever manner necessary to ensure that the LLC is or shall be treated as a partnership under the Code for purposes federal and state taxation.
12.7. Binding
Effect. Except as otherwise provided in this operating agreement, every covenant, term, and provision of this operating agreement shall be binding upon and inure to the benefit of the members and their respective heirs, legatees, legal representatives, successors, transferees, and assigns.
12.8. Construction. Every covenant, term, and provisions of this operating agreement shall be construed simply according to its fair meaning and not strictly for or against any member. The terms of this operating agreement are intended to embody the economic relationship among the members and shall not be subject to modification by, or be conformed with, any actions by the Internal Revenue Service except as this operating agreement may be explicitly so amended and except as may relate specifically to the filing of tax returns.

12.9. Time. Time is of the essence with respect to this operating agreement.
12.10. Governing Law. The laws of the State of Idaho shall govern the validity of this operating agreement, the construction of its terms, and the interpretation of the rights and duties of the members.
12.11. Waiver of Action for Partition; No Bill for Partnership Accounting. Each of the members irrevocably waives any right that he may have to maintain any action for partition with respect to any of the company property. To the fullest extent permitted by law, each member covenants (except with the consent of the managers) not to file a bill for limited liability company accounting.
12.12. Counterpart Execution. This operating agreement may be executed in any number of counterparts with the same effect as if all of the members had signed the same document. All counterparts shall be construed together and shall constitute one agreement.

12.13. Specific Performance. Each member agrees with the other members that the other members would be irreparably damaged if any of the provisions of this operating agreement are not performed in accordance with their specific terms and that monetary damages would not provide an adequate remedy in such event. Accordingly, it is agreed that, in addition to any other remedy to which the nonbreaching members may be entitled, at law or in equity, the nonbreaching members shall be entitled to injunctive relief to prevent breaches of the provisions of this operating agreement and specifically to enforce the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having subject matter jurisdiction thereof.

12.14. Notice. All notices, demands, requests and other communications required or permitted hereunder shall be in writ¬ing and shall be deemed delivered on the earlier of (i) three (3) days after the date of posting of registered or certified mail, addressed to the addressee at its address set forth herein or at such other address as such party may have specified theretofore by notice delivered in accordance with this Section, (ii) attempted delivery or refusal to accept delivery if sent by courier or other personal delivery service, or (iii) actual receipt by the addressee regardless of the method of giving notice. The addresses in this operating agreement, as amended from time to time, shall be used for purposes of giving notice to members.

12.15. Rights and Remedies Cumulative. The rights and remedies provided by this operating agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive the right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise.

12.16. Waivers. The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this operating agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation.
12.17. Attorney Fees. In the event any action is instituted to enforce or determine the parties' rights or duties arising out of the terms of this operating agreement, the prevailing party shall recover reasonable attorney fees and costs through all levels of any action incurred in such proceeding.
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ADOPTED as of the ____ day of ____________, 2007, by the undersigned, constituting all of the members






____________________________


By:__________________________________________

Name:________________________________________

Its:___________________________________________

EXHIBIT A

Legal Description of Property