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.***
*** 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).
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.
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.
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.
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
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 - 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
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 - 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)
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.
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.
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
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