Guiding Questions- Business Law PDF

Guiding Questions- Business law Chapter 1 & 2 - Describe the origin and nature of Business Law. - Provide a definition of the Law, as discussed in class. Law = that which a judge will decide concerning matters properly brought before him/her; in a broader sense, any rule that society will enforce...

Guiding Questions- Business law Chapter 1 & 2 - Describe the origin and nature of Business Law. - Provide a definition of the Law, as discussed in class. Law = that which a judge will decide concerning matters properly brought before him/her; in a broader sense, any rule that society will enforce. Law is the total of rules that aim to create order within society. In other words, law aim to create stability and predictability within society. - How does morality and culture shape the law? Provide concrete examples. Reflects values and beliefs of society or its ruling group. Close relationship btwn morality and any rule that society will enforce. Constantly evolving. Creates stability and predictability. -Why is this especially important in the business context? The Law regulates conduct in society a. Personal Level Citizens need to be able to determine “right from wrong” b. Business Level Degree of “Legal Certainty” in business dealings. -Compare and contrast the Common Law and Civil Law Systems. Civil Law ↔ Common Law Civil Law Common Law Definition = codified law based on the Roman = law as developed and pronounced by code of Justinian; the basis of the the courts in deciding cases (“case legal system in many countries law”), based on the common law of England and judicial precedent Origin ‘Continental European Approach’ ‘Anglo-Saxon tradition’ - Based on Roman Code - Based on Precedent (court decisions) - Found on ‘case-by-case basis’s. - Overall accumulation of judicial decisions Law Codified law - Developed and pronounced by - set out in 1 comprehensive & courts systemized code and accompanying statutes Characteristics - Oldest - Stare Decisis - Most influential legal system -What is “Stare Decisis?” How does it help to shape Business Law? stare Decisis. The requirement that courts follow their own precedents is based on the legal principle of stare decisis or “stand by the decision.” Stare decisis binds all the lower courts of a jurisdiction to determinations rendered by the highest court in that same jurisdiction. Stare decisis is not absolute; a decision of the highest court can be amended either by this court’s changing its mind or by legislative mandate. stare decisis (Latin) “stand by the decision”; a requirement that a court follow its own and higher court precedents! - Based on the Yahoo! case study, explain what is meant by the term “Conflict of Laws?” Conflict of Laws Also known as “Private International Law:” concerns relations across different legal jurisdictions between persons and sometimes companies or other legal entities Definition: a set of procedural rules that determine which legal system, and the law of which jurisdiction, applies to a given dispute. International Private Law ↔ International Law International Private Law International Law Definition A set of procedural rules that determine which legal systems, and law of which jurisdiction, will apply to a legal dispute among individuals involving a foreign element Who? Set of rules or procedural law that Transnational rules that national courts use to regulates relationships between: regulate relationships between: - Persons (or entities) of different - 2 nations nationalities - 1 nation & an individual - Persons/entities from different countries = Conflict of Laws Sources: - int’l conventions & treaties; customs/general practice - widely accepted general principles of law - all other sources used in national law (such as judicial decisions & scholarly writings) - What were the key arguments for Yahoo! and La Ligue in this case? - Can a foreign court dictate what will or will not appear on a U.S. company’s website?  - Does such an order violate the U.S. constitutional right to freedom of speech and expression? What was the court’s 2001 holding and the reasoning for its decision? - 2001: Yahoo! won the case Court’s argument: 1. We cannot enforce a foreign order that will violate US protections (First Amendment). 2. ‘Chilling Effect’ = the inhibition or discouragement of the legitimate exercise of natural and legal rights by the threat of legal sanction (: if Yahoo! has to apply laws of each foreign country and neglect their own, it won’t grow as a business/on the internet) - Why is this case considered a landmark case? Why is the Yahoo! case relevant today, particularly in the business context? => First time to address ‘Free speech on the internet’. (no precedents,…) - ‘Case of First Impression’ = a case that presents a legal issue that has never been decided by the governing jurisdiction - ‘Landmark Case’ = a court decision that establishes an important new legal principle or concept and set new precedents - In your view, what are the most effective cultural & educational strategies and policies that can be used at the EU and international level to raise awareness of online hate speech? Support your position with concrete argumentation. - Compare US vs German Hate Speech laws. Where do you stand with respect to governmental regulation of hate speech? What is the impact on business law, if any? the United States bases its laws in liberty, which is the foundation for hate speech laws in the United States, is generally defined as freedom. This freedom may be, for example, freedom of government, freedom to do as one desires, or freedom from physical restraint. One of the best physical representations of liberty, which also symbolizes its importance to the United States. The basis for hate speech laws in Germany and the United States are vastly different. Germany bases its hate speech laws in dignity, whereas the United States bases its laws in liberty and does not recognize dignity. In Germany, “human dignity” is “broadly defined as an attack on the core area of [the victim’s] personality, a denial of the victim’s right to life as an equal in the community, or treatment of a victim as an inferior being excluded from the protection of the constitution. We argue that Germany’s regulation of hate speech is superior and that the United States should adopt a similar approach, and illustrates how this can be implemented Chapter 4 - Provide a legal definition of “Contract.” Contract = A contract is formed by a meeting of the minds of at least two parties, a mutual assent resulting from the expression of an offer by the one and an acceptance of precisely that offer by the other - Legally binding agreement btwn (+)2 parties, enforceable in a court of law - Creates Trust, Predictability & Consistency ! All contracts = agreements, but all agreements ≠ contracts! - Describe fully the nature, classification & formation of Contracts. A contract is a legally enforceable agreement, express or implied. There are four essentials elements of a valid contract: Capacity of the parties. Mutual Agreement (assent) or meeting of the minds (a valid offer and acceptance). Consideration (something of value given in exchange for a promise). Legality of subject matter. Unilateral ↔ Bilateral Contracts Unilateral Contracts Bilateral Contracts Definition = a promise by one party and an act by = based on an exchange of promises (‘a the other promise for a promise’) Express Contracts ↔ Implied Contracts Express Contracts Implied Contracts Definition = A contract/an agreement that is = A contract in which agreement between expressed in written or oral words; terms parties has been inferred from their are generally “clear & definite” conduct 1. Implied-in-Fact Contracts 2. Implied-in-Law Contracts (=Quasi Contract) -Explain the difference between Express and Implied Contracts, as illustrated by examples. Express Contracts ↔ Implied Contracts Express Contracts Implied Contracts Definition = A contract/an agreement that is = A contract in which agreement between expressed in written or oral words, terms parties has been inferred from their are generally “clear & definite” conduct  3. Implied-in-Fact Contracts 4. Implied-in-Law Contracts (=Quasi Contract) example: A Quasi Contract Stanley Samaritan, M.D., renders assistance to an unconscious person on a city sidewalk. When the patient recovers, he receives a bill for these services. Since the patient received and benefitted from the services, he may be required to pay on grounds of quasi contract. - What are the key elements in an offer? The Offer = Promise/commitment communicated by the offeror to offeree to perform or refrain from performingsome specific act in the future - Manifestations of willingness to enter into a legally binding agreement - 3 factors the Court looks for: 1. Clear intent 2. Sufficiently definite terms 3. Clearly communicated - Business & Commercial context: If an offer is made+accepted, courts will have a strong presumption that parties intended to make a contract - in contrast: social/domestic agreements Acceptance of an Offer A contract is created when the offeree accepts the offeror’s offer. - Voluntary agreement by offeree - Mirror Image Rule Terms of Offer = Terms of Acceptance When does the acceptance occur? Mailbox Rule (Common Law) Receipt Rule (Civil Law) The contract is formed when acceptance is The contact is formed when the acceptance is dispatched by Offeree received by Offeror Termination of an Offer Revocation Rejection The Counteroffer = Withdrawal of an offer by the = Express words or conduct by = Response by an offeree that offeror that terminates the offer the offeree to reject an offer contains terms and conditions terminates the offer different from or in addition to those of the offer Exception: Legal effect: - Firm Offer Rule - Terminates the previous offer - Makes a new offer Why is this particularly important in the context of advertisements? Advertisements (UK/USA) = Invitation to Treat (≠ offer) Exception: (Case B) - Definite and aimed at a specific person/identifiable group of persons - The advertiser has apparent the intent to bind himself to the terms of the advertisement -How does your answer change if your business is located in France vs UK? Belgium vs US? Solutions: Solution 1 Solution 2 Solution 3 - Offer: display of - Offer: display of - Invitation to treat: display merchandise & merchandise of merchandise & advertisement - Invitation to treat: advertisement advertisement - Principles of European - Switzerland - CISG Contract Law (PECL): - Italy - USA (except if ad contains displays & ads by - Serbia words of limitation) professional retailer are - Netherlands - Germany considered offers for as - Lithuania - England long a supplies/stock last - France - Belgium - Describe key differences between Contracts Law from the Common Law vs Civil Law perspectives? - What is the legal significance between a valid, void and voidable contract? Provide an example of each. A valid contract meets all legal requirements and can be enforced by either party. An unenforceable contract does not meet one or more legal requirements and cannot be enforced by either party. Examples are promises to make a gift (no consideration), promises made in jest (no contractual intent), agreements that fail to meet Statute of Frauds requirements, and past breaches of contract now beyond the statute of limitations. A void contract has no validity and cannot be enforced by either party. Examples are illegal agreements made under threat of physical force. A voidable contract is binding on only one of the parties. The other party has the option to withdraw from the contract or enforce it. Examples are contracts made by minors and contracts made under mental duress. - What is Adequate Consideration? Consideration is any lawful alteration of responsibilities that is given in exchange for the other person’s consideration (“his/her lawful alteration of responsibilities”). Consideration is based on the idea of quid pro quo (“something for something”): some action, forbearance, or promise. In almost all contracts, consideration is required for enforceability. It is not necessary that the thing promised be affirmative; it may be refraining from acting or promising not to act (his/her lawful alteration of responsibilities). A promise made to give $1,000 to a friend if she does not smoke (a negative unilateral contract) is mutual and binding. Why must consideration be "adequate" but not necessarily "sufficient?" Adequate consideration in contract law means that the value being exchanged is agreed upon and reasonable. The terms and value of the agreement must be clear and understood by all participating parties. sufficient consideration refers to something of value that is exchanged between parties in a contract. This can be an act, a promise, or a forbearance, and it must be fair and reasonable under the circumstances. Consideration is necessary for a contract to be enforceable, and it must be legally sufficient to support the promises made in the agreement II. Chapters 5 & 6 - Reality of the Contract; Capacity; Legality - Describe the “Meeting of Minds” in the context of Contracts Law. Meeting of the Minds = Offer + Acceptance -Discuss six reasons why mutual assent may be lacking in a contractual framework using examples discussed in class. What? Voidable by who? Mistake (of fact) Bilateral Mistake (Case C) Either party Unilateral Mistake Not possible, unless the other party knows or should have known that a mistake of fact was made Mistake in Value Either party Fraud 5 requirements for finding Fraud: Innocent party i. Misrepresentation of Material fact ii. Made knowingly iii. With intent to deceive iv. Justifiably relied upon v. Causing injury to the other party Innocent Innocent (non-erring) Misrepresentation party Undue Influence (Presumption of Undue Influence by more Innocent party powerful party) - Confidential or Fiduciary Relationship - Relationship of Dependence - Why is an intoxicated person not given the same protections as minors and incapacitated persons with respect to Contracts Law? An intoxicated person becomes intoxicated by reason of his/her own freedom of action and is not within a class of persons whom society seeks to protect. Thus, unless the intoxication is evident to the other party, he/she is bound by a contract made while intoxicated. - Name four confidential relationships where undue influence could exist. Undue influence involves using one's power to manipulate another into a contract. Examples of this include using one's power as an attorney to get money or free work out of their client or manipulating the vulnerable. 1- A dying patient deeds over valuable property to his doctor. 2- Student seeking information and extra credits from a teacher 3- A client wins a large judgment in a lawsuit and then lends a portion of the award to her attorney. 4- A husband, hospitalized because of a serious illness, signs insurance releases for the sole benefit of his wife, and upon her advice. - Define the terms “Capacity” and “Legality” from a contractual point of view. Capacity of Parties Definition: The term “capacity” relates to the ability of one mind to meet another mind. This ability may not yet be developed in a minor and may be clouded or confused by insanity or alcohol/drug use. Question: Are both parties Legally Empowered & Capable of entering into and carrying out of terms of contract? a) of Legal Age b) of Sound Mind c) Limitations of Corporate Powers 1. Legality of Contract Definition: A contract to do something prohibited by law is illegal and therefore “void” (ie, it never existed) = not enforceable in court of law - Court will not enforce contract if agreements are: - Prohibited by law - Illegal/ immoral conduct - “against public policy” - Restraint of Trade Exception: a) Covenant not to Complete and Sale of Business b) Covenant not to Compete in Employment - Social arrangements - Exception: - Justifiable Ignorance of the Facts - Members of Protected Classes - Withdrawal from an Illegal Agreement - Contract Illegal through Fraud, Duress, or Undue Influence - Severable or Divisible Contracts Describe the effect of an illegal agreement under Contracts Law. - An illegal agreement is one that involves actions that are prohibited by law. These agreements are considered void and unenforceable by the courts. In contract law, if an agreement is found to be illegal, the parties involved will not be able to seek legal remedies for any breach of that agreement. Additionally, entering into an illegal agreement can lead to legal consequences for the parties involved, such as fines or even criminal charges. It's important to ensure that any agreements you enter into comply with the law to avoid these negative consequences. Chapter 8: Discharge, Damages and Contractual Excuses - Define the terms “Discharge of Contract,” and “Damages,” as illustrated by examples as discussed in class. Discharge of Contract = discharge is the general legal term describing completion or termination of the contract Includes: 1. Performance = Fulfilment or accomplishment of a contract “the parties to the contract have completely performed all their contractual obligations” 2. Discharge by Agreement. Mutual Recission. Accord and Satisfaction Damages = Compensation due to the nonbreaching party to recover any financial loss or injury caused by a breach of contract. Money Damages.Specific Performance Extra info Breach of Contract = One party to the contract fails in a material way to perform the terms of the contract. The other party has no obligation on the contract. The nonbreaching party = responsible for value received (quantum meruit) in quasi contract. Substantially performed ≠ materially breached - Explain the difference between direct and indirect damages as illustrated by the landmark case, Hadley vs Baxendale. Compensatory Damages (= Direct) Consequential Damages (= Indirect) Injured - Sustains & proves an injury arising - Given the entire benefit of the bargainonly when Party directly from the loss of the there are special circumstances of which the bargain breachingparty is aware (or should have been => Compensated for the loss of aware) causing the injured party additional loss thebargain (= Loss of Bargain) Breaching - Rectify defect - Cover the ‘lost bargain’ + foreseeablelosses (that Party - Compensate non-breaching party for were not part of the original contract) damages sustained directly due tothe breach Why does this matter to Business Law? => Principle: a breaching party is liable for all losses that the contracting parties should have expected, but not for any losses that the breaching party could not have expected based on the information available to him. - Describe the three key elements needed to successfully bring a contract case in Court 1. Proof of existence of contract 2. Proof that the contract was breached by Defendant 3. Proof that, as a result of Defendant’s breach, the Claimant has been injured/damaged - From a legal point of view, what is the difference between” the doctrine of frustration” (impossibility) and Force Majeure? Why is this difference important from a business perspective? Provide examples. The doctrine of frustration, also known as impossibility, and Force Majeure are legal concepts that address situations where performance of a contract becomes impossible due to unforeseen circumstances. The key difference between the two is that frustration typically applies when the circumstances make performance of the contract impossible, whereas Force Majeure covers situations where performance is hindered or delayed due to external, unforeseeable events beyond the parties' control. The doctrine of frustration Destruction of subject matter: if a venue booked for a concert is destroyed by a fire before the Illness or incapacity: if a singer falls ill before a scheduled performance and cannot perform Legal changes: if a new regulation prohibits the sale of a certain product agreed upon in a contract Unforeseen circumstances: Death/incompetence of performer War or political unrest: war, political unrest, or other international events beyond the parties' control Force majeure Natural disasters: such as earthquakes, floods, hurricanes, tornadoes, wildfires Acts of war or terrorism: War, terrorism, civil unrest, riots, and other acts of violence Government actions: Government actions such as expropriation, changes in laws or regulations  Pandemics and epidemics: Health crises like pandemics (e.g., COVID-19) Labor strikes and disputes: Strikes, lockouts, and other labor disputes Energy or utility failures: Unforeseen failures in energy or utility supply (e.g., power outages) Acts of God: Events considered "acts of God," such as lightning strikes, volcanic eruptions From a business perspective, it's important to understand this difference because it can impact how contracts are interpreted and how parties can respond to unforeseen events. Under the doctrine of frustration, a contract may be deemed void if performance becomes impossible, relieving both parties of their obligations. On the other hand, a Force Majeure clause allows parties to suspend or delay performance under specific circumstances outlined in the contract, providing some protection and flexibility during unpredictable events. What is the difference between anticipatory breach and Nachfrist notice? Discharge by Breach Anticipatory Breach (Case D) Nachfrist Notice (Case E) (Common Law concept) (Civil Law concept) Occurs if one party to a contract clearly The nonbreaching party can delcare a states/implied that they cannot or will not fundamental breach (= Nachfrist Notice), which perform as agreed, even though the time of notifies the breaching party that it has been performance has not yet arrived given an additional specific period of time to - Demand assurance if breach appears comply with the contract. probable, but not certain. Repudiation If not corrected, the nonbreaching party has the will occur for sales contracts if no right not to perform anymore and void the assurance is given within a reasonable contract period - Let the contract be discharged (by declaring) - Let the nonbreaching party do more than sue without waiting for the due date of for damages performance - Adopted by Principles of European Contract Law (PECL) Chapter 20: Property Law - Provide a legal definition of Property. Legally protected rights and interests a person has in anything with an ascertainable value that is subject to ownership. It encompasses the right to possess, use, enjoy, and dispose of a thing. Property can be tangible (physical objects such as land, buildings, vehicles) or intangible (such as intellectual property rights, stocks, bonds). - What are the basket of rights associated with property ownership? Erga Omnes (towards all/everyone). The rights or obligations owed to the holder against all others for real and personal property. A property right is an erga omnes entitlement = against anyone infringing upon that right Under what circumstances may a person hold the entire “bundle of rights?” Under what circumstances may a person hold less than the entire “bundle?” Provide examples to support your response. Ownership = holding the title to the property Possession = possess the property without holding the title Indicates the existence of a property right (≠ necessarily the entire ‘bundle of rights’) => public acknowledgement (French and German law Article 2276 Cciv, §1006 BGB): provide for a legal presumption that the possessor of a moveable object is also the owner Bailment/Detention = bailor (owner) transfers possession (≠ title) of personal property to the bailee 4 requirements of Bailment: 1. Bailor retains title 2. Bailee obtains possession - Delivery by bailor - Acceptance by bailee 3. Possession is for a specific purpose 4. Possession is temporary. Property ultimately reverts to bailor or bailor’s designee - What are the three basic elements of a gift? Donative intent, delivery, and acceptance. - What is an easement? Provide an example. Definition: a non-possessory interest in land created either by express agreement or by operation of law (implied) Grants to its holder a limited right to use of another person’s land for a specific purpose Most easements are affirmative but may also be negative if they restrict the property owner’s rights in any way Examples: Easement in Gross: a company holds an easement in gross to install a pipeline that runs across a property Conservation Easement: A landowner grants an easement to a land trust, preventing development on their land to protect a wildlife habitat or preserve a historic site. Right-of-Way Easement: A homeowner grants a neighbor an easement to use a driveway that cuts through their property to access the neighbor's land, which is otherwise landlocked. - What is eminent domain? Provide an example. The right of federal and state governments, as well as other entities with governmental powers, to take privately owned real property for public benefit - Owner must be compensated (amount = the property’s fair market value before the taking occurred) for the property taken - What is Adverse Possession (“Squatter’s Rights”) and why is it important to Property Law? Provide an example. Adverse possession. If a trespasser actually occupies property continuously, exclusively, openly, and in a manner hostile to the owner’s rights (without permission), and if this state of affairs lasts for the period of time required by state statute (it varies from about 5 to 20 years), then the owner’s title passes to the trespasser by adverse possession. Some states require that the trespasser have had at least some claim of title beforehand, and most states look to whether the would-be adverse possessor paid taxes on the property. Neither government land nor land occupied by permission of the owner can be acquired by adverse possession. - How can property rights be created? Fee Simple Absolute “The grant of a fee in land conveys to the grantee complete ownership, immediately and forever, with the right of possession from boundary to boundary and from the center of the earth to the sky, together with all the lawful uses thereof.” => law presumes that the estate being transferred is a fee simple, unless the conveyance expressly states to the contrary.Strongest form of ownership Exceptions -Mortgage -Easement -Liens -Laws, regulations & zoning requirements -Adverse possession (‘Squatter’s Rights’) - Compare and contrast the difference between ownership and possession. Ownership: I hold title to the house I bought (I may live in it or not) Possession: My son rents an apartment where he currently lives - Explain the difference between Bailment, Lease and Sale 1. Nature of Transfer: o Bailment: Temporary transfer of possession for a specific purpose. o Lease: Temporary transfer of possession and use for a specified period. o Sale: Permanent transfer of ownership. 2. Ownership: o Bailment: Ownership remains with the bailor. o Lease: Ownership remains with the lessor. o Sale: Ownership transfers to the buyer. 3. Duration: o Bailment: For the duration of the specific purpose. o Lease: For the duration specified in the lease agreement. o Sale: Permanent, unless otherwise agreed upon (e.g., conditional sales). 4. Payment: o Bailment: Usually no payment, though sometimes a fee may be involved (e.g., for storage). o Lease: Regular payment (rent) is required. o Sale: One-time payment or agreed-upon terms of payment. - List the eight rights associated with land ownership. Provide an example of each. 8 Rights associated with Land Ownership 1. Surface rights = a landowner holds the exclusive right to occupy the surface of a piece of land 2. Subterranean rights = A landowner has the exclusive right to oil, minerals, and other substances found beneath the land’s surface. He/she is also entitled to a reasonable use of percolating (subsurface) waters; this last right is often treated as a riparian right 3. Air rights = A landowner has the exclusive right to the air above his/her land, to that height over which control is reasonable. (Obviously, absent zoning restrictions, a landowner cannot prevent airplanes from flying over his/her property at a safe altitude) 4. Right to trees, crops, or other vegetation on the land 5. Right to fixtures 6. Right to lateral and subjacent support = A landowner’s neighbors may not excavate or otherwise change their own land to such an extent that the owner’s lands or buildings are damaged. 7. Right to be free of public and private nuisances = A landowner may request a court order to abate pollution, noxious odors, excessive noise, or other interference with his/her enjoyment of the land. (If governmental actions make the land uninhabitable, the owner may seek “inverse condemnation”—an order that the government take the property by eminent domain and compensate the owner.)  8. Riparian rights = A landowner may use a natural waterway within his/her property. (Title to navigable streams extends only to their low water mark, with the federal government owning the rest) Bundle of Rights / Civil Law Approach As property owner, your “Bundle of Rights” includes: Usus: Possession, improve, modify, enjoy, control, exclude Fructus: receive rents, dividends, crops, timber, etc. Abusus: sell or transfer, destroy, lien (security for loan) Bundle of Rights – Property Owner of property Crown/ Government - Sell or transfer property - Tax property - Occupy, control and use property - Make laws in regards to property - Borrow against property - Expropriate interests from property for - Protect your interest in property public purposes (ex. Eminent Domain) Chapter 13: Creditor-Debtor Relations; Secured Transactions; Bankruptcy and Receivership: - What is the test for insolvency (also known as the “bankruptcy test”)? Inability to pay debts as they become due. - Describe the difference between Bankruptcy and Reorganization. What rights are available to Creditors? What protections are available to Debtors? Bankruptcy = Legal procedure for settling the debts of individuals or business entities that are unable to pay debts as they become due : The state of insolvency or inability to pay one’s debts when due Reorganization Plan to continue operating the business Develop a corporate restructuring plan Create more efficient expense structure => Goal: Position company to compete more effectively - What is the Trustee’s role in Bankruptcy? Acquires title of all of the Bankrupt’s property Administers the estate by collecting and liquidating any “nonexempt” assets Deciding claims - Provide a definition of the terms Pledge and Secured Transaction. How do these terms differ and why? Give an example of each. Pledge: A pledge is a type of security interest where personal property is delivered by a debtor (the pledgor) to a creditor (the pledgee) to secure the payment of a debt or the performance of an obligation. The creditor retains possession of the pledged property until the debt is paid or the obligation is fulfilled. If the debtor defaults, the creditor has the right to sell the pledged property to satisfy the debt. Secured Transaction: A secured transaction involves a debtor granting a security interest in personal property (collateral) to a creditor to secure a loan or obligation. Unlike a pledge, the debtor typically retains possession of the collateral. The creditor's security interest is documented in a security agreement and often perfected by filing a financing statement. If the debtor defaults, the creditor has the right to take possession of and sell the collateral to satisfy the debt. Differences Between Pledge and Secured Transaction 1. Possession of Collateral: o Pledge: The creditor takes possession of the collateral. o Secured Transaction: The debtor usually retains possession of the collateral. 2. Type of Agreement: o Pledge: Often involves a simpler agreement due to the transfer of possession. o Secured Transaction: Requires a detailed security agreement and often a public filing to perfect the security interest. 3. Perfection of Security Interest: o Pledge: The security interest is perfected by the creditor taking possession of the collateral. o Secured Transaction: The security interest is typically perfected by filing a financing statement or by possession/control, depending on the type of collateral. 4. Legal Framework: o Pledge: Generally governed by common law principles or specific statutes. o Secured Transaction: Governed by the Uniform Commercial Code (UCC) Article 9 in the United States. - What is achieved by Attachment of a Security Interest in collateral? Enforceable Security Interest => Attachment = The process by which a Security Interest in the property of another becomes enforceable Ensures that the S.I. between Debtor and Secured Party is effective/enforceable S.I. is not enforceable unless the Creditor’s rights have “attached” to the Collateral How to attach SI to Collateral? a) Possession IF NOT: 1. agreement in writing (= the Security Agreement) 2. Creditor must give Value to Debtor 3. Debtor must maintain Rights in Collateral b) Physical Transfer of Collateral to Secured Party - What is the legal implication of “perfection” under Common Law? Legal Implications of Perfection 1. Priority Over Unperfected Interests:  o A perfected security interest typically has priority over unperfected security interests in the same collateral. This means that if a debtor defaults and multiple creditors claim an interest in the same collateral, the perfected creditor's claim will generally take precedence. 2. Protection Against Third Parties: o Perfection provides public notice of the secured party's interest in the collateral, which helps protect the secured party against claims by subsequent purchasers or other creditors who may also have an interest in the same collateral. 3. Enforcement Rights: o A perfected security interest strengthens the secured party's position in enforcement proceedings. In the event of debtor default, the secured party can enforce its rights to seize and sell the collateral to satisfy the debt. Methods of Perfection 1. Filing a Financing Statement (UCC-1): o This is the most common method of perfection. Filing a UCC-1 form with the appropriate state authority (usually the Secretary of State) provides public notice of the secured party's interest in the collateral. 2. Possession of Collateral: o For certain types of collateral, such as tangible personal property, perfection can be achieved by taking possession. This method is often used in pledges, where the creditor holds the collateral. 3. Control: o For certain types of intangible collateral, such as deposit accounts, electronic chattel paper, or investment securities, perfection can be achieved by control. This means the secured party has the ability to direct the disposition of the collateral without further action by the debtor. 4. Automatic Perfection: o In some cases, perfection can occur automatically without filing or taking possession. For example, a purchase money security interest (PMSI) in consumer goods is automatically perfected upon attachment. - What is meant by the term Priority of Creditors (see textbook, table on p. 284, first 4 rows) Priority of Creditors In the context of secured transactions and bankruptcy, "priority of creditors" refers to the legal order in which creditors are paid from the assets of a debtor who is unable to meet all their financial obligations. This concept is crucial because it determines the sequence in which various creditors will be satisfied in the event of debtor default or bankruptcy. Here are the first four rows of the priority of creditors table, commonly found in business law textbooks, particularly as it pertains to secured transactions and bankruptcy scenarios: 1. Secured Creditors with Perfected Security Interests: o Definition: Creditors who have taken steps to perfect their security interests (e.g., by filing a financing statement, taking possession of the collateral, or having control over the collateral). o Priority: These creditors have the highest priority. They have a legal claim to specific collateral and are paid first from the proceeds of the sale of that collateral. 2. Secured Creditors with Unperfected Security Interests: o Definition: Creditors who have a security interest but have not taken the necessary steps to perfect it (e.g., they haven't filed the financing statement).  o Priority: These creditors have a lower priority than perfected secured creditors but higher than unsecured creditors. Their claim is secondary to those with perfected interests and may be challenged by other creditors. 3. Lien Creditors: o Definition: Creditors who have obtained a judicial lien or statutory lien on the debtor's property. This includes creditors who have sued the debtor, obtained a judgment, and then secured a lien on the debtor's property as part of the enforcement of that judgment. o Priority: Lien creditors are next in line after secured creditors with perfected security interests. Their priority depends on the timing of the lien relative to the perfection of other security interests. 4. Unsecured Creditors: o Definition: Creditors who do not have a security interest in any specific collateral of the debtor. These include suppliers, vendors, and others who have provided goods or services on credit. o Priority: Unsecured creditors are at the bottom of the priority list. They are paid only after all secured and lien creditors have been satisfied. In many cases, unsecured creditors receive only a fraction of what they are owed or nothing at all if the debtor's assets are insufficient. Examples 1. Example of Secured Creditor with Perfected Security Interest: o A bank lends money to a business and secures the loan with a perfected security interest in the business's inventory by filing a UCC-1 financing statement. If the business defaults, the bank has first claim to the inventory or its proceeds. 2. Example of Secured Creditor with Unperfected Security Interest: o A supplier provides equipment to a company on credit and takes a security interest in the equipment but fails to file the necessary financing statement. If the company goes bankrupt, the supplier's claim to the equipment is subordinate to other perfected secured creditors. 3. Example of Lien Creditor: o A contractor sues a business for non-payment and wins a judgment. The court places a lien on the business's property. The contractor, as a lien creditor, has a priority claim over unsecured creditors but may still be subordinate to perfected secured creditors. 4. Example of Unsecured Creditor: o An office supply company sells products to a business on credit without any security interest. If the business files for bankruptcy, the office supply company is an unsecured creditor and will be paid after all secured and lien creditors, often receiving only a portion of the debt or nothing at all. - What is the problem with proceeds? What legal steps can be taken to ensure protection of Creditor’s interests? the issue with proceeds arises when a debtor sells or otherwise disposes of collateral subject to a security interest. The original collateral is converted into different forms, such as cash, accounts receivable, or new inventory, which are collectively referred to as "proceeds." The main problem for creditors is ensuring that their security interest continues in these proceeds, maintaining their priority and protection. Challenges with Proceeds 1. Identification and Tracing: o It can be difficult to identify and trace the proceeds of the original collateral, especially when the proceeds are commingled with other funds or used to acquire new assets. 2. Perfection of Security Interest in Proceeds: o The creditor must ensure that their security interest in the proceeds is perfected, similar to the original collateral. If this is not done, the security interest may become unperfected, risking the loss of priority and enforceability against third parties. 3. Maintaining Priority:  o Even if the security interest in the proceeds is perfected, the creditor must ensure that it maintains its priority over other creditors and parties who might claim an interest in the proceeds. Legal Steps to Protect Creditor’s Interests To protect a creditor's interests in proceeds, several legal steps and provisions under the Uniform Commercial Code (UCC) can be taken: 1. Inclusion in Security Agreement: o Ensure that the security agreement explicitly includes a clause that covers proceeds. This clause should specify that the security interest extends to all proceeds derived from the sale, exchange, or disposition of the original collateral. 2. Automatic Perfection of Proceeds: o Under UCC Article 9, a security interest in proceeds is automatically perfected if the original collateral was perfected. This automatic perfection lasts for a limited period, typically 20 days. After this period, additional steps may be necessary to continue the perfection. 3. Filing a Financing Statement: o File a UCC-1 financing statement that indicates the security interest covers proceeds. This filing puts third parties on notice of the creditor's interest in the proceeds. 4. Continuously Perfecting Security Interest: o After the 20-day period of automatic perfection, ensure continuous perfection of the security interest in proceeds by filing an amended financing statement or by taking possession or control of the proceeds if applicable. 5. Tracing Proceeds: o Implement accounting and record-keeping procedures to trace the proceeds. This may involve requiring the debtor to segregate proceeds from other funds or maintain detailed records of transactions involving the collateral. 6. Control Agreements: o For certain types of proceeds, such as deposit accounts, establish control agreements with the debtor and the depository institution. This ensures that the creditor can control the disbursement of funds from the account, maintaining their security interest. Chapters 15- Franchises - What is a franchise? What are the three main categories of franchises? Provide an example of each. Franchise = a contractual arrangement whereby, in return for an initial fee and recurring royalties from the franchisee, the franchisor permits its franchisees the use of their trademark; trade name; copyright; patent; trade secret; business operations; process; or system in furnishing goods or services. 3 factors present: Licensed trademark Example: Ford Motor Company Description: Ford dealerships operate under a product distribution franchise model. The dealerships sell cars, trucks, and parts manufactured by Ford. The franchisee (dealership) uses the Ford brand and adheres to Ford's standards for sales and service but operates as an independent business. Business operating format & prescribed marketing plan Example: McDonald's Description: McDonald's is a classic example of a business format franchise. The franchisor provides franchisees with everything needed to run a McDonald's restaurant, including the brand name, menu, recipes, training, advertising, and operational systems. The franchisee operates the restaurant following the franchisor's established guidelines. Continuous financial arrangement – royalties for the right to participate in the franchise and receive ongoing support Example: Hilton Hotels & Resorts Description: Hilton Hotels operates as a management franchise. Franchisees own and manage individual hotel properties under the Hilton brand. Hilton provides the brand name, reservation systems, marketing support, and operational standards, while the franchisee oversees the daily operations, guest services, and maintenance of the hotel. -What are some general customary provisions found in most franchise agreements? The Franchise Agreement = document covering many aspects of the prospective franchisor-franchisee relationship - Usually prepared by Franchisor Standard Contract Provisions a) Franchisee’s initial payment + continuing royalties - Royalty clause (lump sum, percentage, momentum) b) Franchisor’s control/specifications over various issues directly related to the Franchise - Site selection - Physical layout - Operational standards - Inspection and audit - Transfer and assignment - Noncompetition clause - Confidentiality Clause: IPR/Know-How - Uniform treatment among franchisees c) Duration, renewal terms and termination - Termination What are some advantages and disadvantages to franchising from both the Franchisor and Franchisee’s perspective? Franchisor Franchisee Obligation Permits the use of: - Initial fee - Trademark - Recurring royalties - Trade name - Trade secret - Copyright/patent - Business operations - Process - System Provide: - Business experience - Capital + entrepreneurial skills - Access to local network Advantages: - Absorb less risk of loss - Start business with limited capital - Greater efficiency in limiting and experience (≠ start from 0) costs & expanding sales - Higher survival rate - Less input on advertisement - Access to supplied and prices based on volume purchases - Rely on the goodwill generated by a well-known trade name/product Disadvantages: - Big group of franchises connected - Costs, (hidden) fees to each other (1 bad remark will - No room for creativity affect your brand name) - Less power (dependent: ask for - Difficulty controlling every approval, taking advantage off,…) franchise