Case study – assignment – law-101: legal environment of business.

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Question for Case Study1. 

Q1) What will be the result?

Q2) How could this dispute have been avoided in the first place?

Question for Case Study2.   

What advice would you give Deidre?

Solve these 3 questions

the words between 500 to 700

it should have at least three (3) reference

Case Study1

John, Lesa, and Trevor form a limited liability company. John contributes 60 percent of the capital, and Lesa and Trevor each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Trevor, however, assume that the profits will be divided equally. A dispute over the profits arises, and ultimately a court has to decide the issue.

Q1) What will be the result?

Q2) How could this dispute have been avoided in the first place?

Case Study2

Deidre McFadden came to the offices of Webber & Associates seeking help in organizing her business, Fashion Angels, a toy-making enterprise focusing on dolls with multiple outfits. She wants to run the business and has few personal assets so is not worried about personal liability. Deidre’s aunt, Penelope, is elderly, wealthy, and adores her only niece. Penelope is willing to invest $500,000 to start the business, and Deidre has $10,000 to contribute on her own. Deidre expects to do all the work without compensation as it will take at least a year before Fashion Angels will make any profit. Penelope will sign any agreement terms, with one condition. Penelope is insisting that Deidre cannot leave the company, stating “I don’t want my money going to a stranger, it’s for Deidre.” 

 Deidre is looking for your advice as to the type of entity that would suit her best. “I don’t want my aunt to become the target for bill collectors if I fail. And to be honest, I really don’t want her interfering in the business because she can be quite aggressive.”

Q1) What advice would you give Deidre?

Chapter 02

Business Ethics

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 2 Case Hypothetical and Ethical Dilemma

2-*

As hiring coordinator for Hennessey Networking Solutions, Inc. (Hennessey), Andrea

Templeton knew that her position was of utmost importance to her company in terms of

hiring candidates who were well-qualified, and who would best contribute to the company’s

overall success. On her desk was the employment application and resume of Timothy

Carraway. Andrea had just finished her interview of Timothy, who was the last in a long line

of interviewees who had applied for an entry-level information technology (IT) position at

Hennessey. Hennessey only had one (1) opening available. During Timothy’s interview,

the candidate revealed that seven (7) years ago, he had been tried and convicted in federal

court for selling a significant amount of cocaine. Timothy had also revealed the conviction

on his employment application. Timothy went to great lengths to explain to Andrea that he

sincerely regretted the indiscretions of his youth, and that he had spent the last seven (7)

years of his life “paying penance,” and reforming his life. After serving three (3) years in

federal penitentiary, Timothy had earned his bachelor’s degree in Information Technology,

graduating with honors.

Timothy’s interview had gone very well. In fact, Andrea felt that in terms of his personality

and education, he was the best “fit” for the position. Andrea was obviously concerned

about Timothy’s criminal background, but she was also concerned about the young man

should he not find an employment opportunity after graduating from college. Without a

legitimate employment option, would Timothy revert back to his “criminal ways?

Does Andrea Templeton and Hennessey Networking Solutions, Inc. have an ethical

obligation to hire Timothy Carraway? Should Andrea’s “hire” decision be based

exclusively on Timothy’s qualifications for the job? Why or why not?

Chapter 2 Ethical
Dilemma

2-*

What is the best source for ethical business practices: The

individual employee, or the business organization itself? To

what extent should individual employees be allowed to lend

input in the creation of a code of ethics for a business

organization? In the event that an individual employee’s ethical

standards differ from his/her employer’s code of ethics, what

can/should be done to resolve those differences?

Business Ethics and Social
Responsibility

2-*

■ Ethics: The study and practice of decisions about what
is good or right

■ Business Ethics: The application of ethics to the
problems and opportunities experienced by
businesspeople

■ Ethical Dilemma: A problem about what a firm should
do for which no clear, right decision is available

■ Social Responsibility of Business: Expectations that the
community imposes on firms doing business inside its
borders

The “WPH” Process of Ethical Decision
Making: W—WHO (Stakeholders)

2-*

■ Consumers

■ Owners or Investors

■ Management

■ Employees

■ Community

■ Future Generations

The “WPH” Process of Ethical Decision
Making: P—PURPOSE (Values)

2-*

■ Freedom

■ Security

■ Justice

■ Efficiency

Primary Values and Business Ethics:
Freedom

2-*

■ To act without restriction from rules imposed by

others

■ To possess the capacity or resources to act as

one wishes

■ To escape the cares and demands of this world

entirely

Primary Values and Business Ethics:
Security

2-*

■ To possess a large enough supply of goods and

services to meet basic needs

■ To be safe from those wishing to interfere with

your property rights

■ To achieve the psychological condition of self-

confidence to such an extent that risks are

welcome

Primary Values and Business Ethics:
Justice

2-*

■ To receive the products of your labor

■ To treat all humans identically, regardless of

race, class, gender, age, and sexual preferences

■ To provide resources in proportion to need

■ To possess anything that someone else is willing

to grant you

Primary Values and Business Ethics:
Efficiency

2-*

■ To maximize the amount of wealth in society

■ To get the most from a particular output

■ To minimize costs

The “WPH” Process of Ethical Decision
Making: H—HOW (Guidelines)

2-*

■ Public Disclosure

■ Universalization

■ Golden Rule

Chapter 03

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

The U.S. Legal System

Chapter 3 Case Hypothetical #1

Officer Brian Perkins was having a difficult Monday morning. For the past three

hours, he was responsible for “serving process” in three (3) civil cases (As

Chapter 3 indicates, service of process is the procedure by which courts present

litigation documents to defendants. Those documents typically consist of a

complaint, which specifies the factual and legal basis for the lawsuit and the relief

the plaintiff seeks, and a summons, a court order that notifies the defendant of the

lawsuit and explains how and when to respond to the complaint). For the first civil

case, Merriwether v. Alstott, Officer Perkins attempted to serve the defendant

Harry Alstott at his home, but no one appeared to be there. For the second civil

case, Setliff v. Sanders, the person answering the door claimed the defendant,

Marshall Sanders, did not live there, and that he did not even know who Marshall

Sanders was. Leaving the premises, Officer Perkins surmised that the residential

address indicated on the summons was incorrect. Either that, or the person who

answered the door was lying.

3-*

Officer Perkins asked the not-so-polite occupant to open the door, to

which she responded, “I ain’t comin’ down there, and if you ain’t got a

warrant, you ain’t comin’ in.” Frustrated, Officer Perkins replied, “Well, I

have civil papers to serve you, ma’am, and if you won’t come down to

get them, I’m going to put them in your mailbox.” The response was, “I

ain’t comin’ to the door.”

For his third attempt at service of process that morning, in a lawsuit

captioned Jackson v. Graves, Officer Perkins drove to the home of Laticia

M. Graves at 721 Magnolia Street. Officer Perkins knocked on the door of

the dilapidated house, and although no one answered the door, a second-

story window opened almost immediately. A female in the house looked

down from her second story vantage point and pointedly asked Officer

Perkins, “What do you want?” Officer Perkins responded with a question,

“Are you Laticia Graves,” to which the woman responded, “Yeah. What’s it

to you?”

Officer Perkins immediately proceeded to the mailbox, and put the

complaint and summons in the matter of Jackson v. Graves in the box.

The address on the mailbox indicated 721 Magnolia Street. In his notes,

Officer Graves wrote that the defendant, Laticia Graves, had been

served with process on Monday, September 13, 2010 at 11:47 a.m. As

he entered his patrol car, Officer Perkins looked backed at the second-

story window from which he had received his impolite greeting. The

woman had since closed the window, and was watching his every

move.

Did Officer Perkins effectively serve process on the defendant, Laticia

Graves? Why or why not?

Chapter 3 Case Hypothetical #2

3-*

Defendant Woodson is an African-American male accused of murdering a white female

in an apartment burglary. During the jury selection process, Prosecutor Forbes exercises

only two peremptory challenges, excusing from service the only two African-

Americans in the jury. An all-white jury is eventually empanelled, and Defendant

Woodson is convicted of first-degree murder, with life imprisonment imposed as

punishment.

After the jury verdict is announced, Prosecutor Forbes is questioned by the local media

concerning his exercise of the peremptory challenges. Prosecutor Forbes explains that

race was not a factor in his decision, but that the two potential jurors were excused

“because they have facial hair, and as a matter of practice, I do not want individuals

with facial hair serving on my jury.” Further, Prosecutor Forbes states “I categorically

deny that race played any factor whatsoever in the jury selection process.”

On appeal, should the appellate court: 1) deem Prosecutor Forbes’ actions reversible

error, and remand the case to the trial court level to be retried; 2) vacate (nullify) the jury

verdict, and dismiss the charges against Defendant Woodson; or

3) allow the conviction to stand? Should prosecutors be allowed to consider race as a

factor in the jury selection process? Gender? Age?

Types of Jurisdiction

3-*

■ Original Jurisdiction:

The power to hear and

decide cases when they

first enter the legal

system

■ Appellate Jurisdiction:

The power to review

previous judicial

decisions to determine

whether trial courts erred

in their decisions

Types of Jurisdiction

3-*

■ In personam jurisdiction:

The power to render a

decision affecting the

rights of the specific

persons before the court

■ Subject-matter

jurisdiction: The power

to hear certain kinds of

cases

Subject-Matter Jurisdiction:
Exclusive Federal Jurisdiction

3-*

■ Admiralty cases

■ Bankruptcy cases

■ Federal criminal prosecutions

■ Cases in which one state sues another state

■ Claims against the United States

■ Federal patent, trademark, and copyright claims

■ Other claims involving federal statutes that specify

exclusive federal jurisdiction

Subject-Matter Jurisdiction: Concurrent
Federal and State Jurisdiction

3-*

■ Federal question cases

■ Diversity of citizenship cases

Subject-Matter Jurisdiction: State
Jurisdiction

3-*

■ All cases not falling under Exclusive Federal

Jurisdiction

The Federal Court System

3-*

■ The United States Supreme Court

■ Intermediate Courts of Appeal

■ Federal Trial Courts (U.S. District Courts)

State Court Systems

3-*

■ State Supreme Courts

■ Intermediate Courts of Appeal

■ State Trial Courts

Threshold Requirements for
Litigation

3-*

■ Standing (to sue)

■ Case or Controversy (Justiciable Controversy)

■ Ripeness

Steps in Civil Litigation:
The Pretrial Stage

3-*

■ Informal Negotiations

■ Pleadings

■ Service of Process

■ Defendant’s Response

■ Pretrial Motions

■ Discovery

■ Pretrial Conference

Steps in Civil Litigation:
The Trial

3-*

■ Jury Selection

■ Opening Statements

■ Examination of Witnesses and Presentation of

Evidence

■ Closing Arguments

■ Jury Instructions

Steps in Civil Litigation:

Post-Trial Motions

3-*

■ Motion For Judgment In Accordance With

Verdict

■ Motion For Judgment Notwithstanding Verdict

■ Motion For New Trial

Steps in Civil

Litigation:

3-*

Appellate Procedure

Appellate Court Decision-Making
Powers

3-*

■ Affirmation

■ Modification

■ Reversal

■ Remand

Chapter 13

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Introduction to

Contracts

Chapter 13 Case Hypothetical

13-*

Zsa Zsa Hilton, a wealthy socialite living in Beverly Hills, was frantic. Her best friend

in the world was her pet poodle Caboodles, and Caboodles had been missing for three

(3) days.

Having searched her estate exhaustively, Zsa Zsa decided that her next best option

was to post a reward for her beloved Caboodles.

Zsa Zsa carefully prepared a poster advertising a reward for the return of her pet. The

heading of the poster exclaimed “Please find Caboodles—Reward–$25,000!!!” Below

the heading was a color “glamour shot” of the animal and Zsa Zsa’s contact information,

including her address and cell phone number. After soliciting the assistance of her butler,

her maid, and her best friend Eva Ritchie, Zsa Zsa displayed and distributed one

thousand of the posters throughout the greater Beverly Hills metropolitan area.

Later in the week, Dane “Bulldog” Sheppard showed up at Zsa Zsa’s front door. When

she answered the door chime, Dane said “I am pleased to meet you, Ms. Hilton. I saw

your ad for the return of your lost poodle, and I am your man. I will find him, Ms.

Hilton, and let me say in advance that I really appreciate the $25,000 bounty, um,

reward money!”

Is there a contract between Dane “Bulldog” Sheppard and Zsa Zsa Hilton?

Carter Morley and Erena Erickson live side by side in town homes joined together by a
shared wall. Both residences are in need of new exterior paint. On Monday, Morley calls

a painter, Tom Sizemore, having selected his name from the classified section of the
phone directory. Morley describes his address, the physical dimensions and structure of

his home, and he agrees with Sizemore that the work will be performed that Friday.
Sizemore estimates that with his crew of five, and given the relatively small size of the

home, the work will only take one day to complete. Morley advises that although he will
have to work a fourteen-hour day on Friday, he would like to have the work completed in
his absence. In passing conversation with his neighbor Erickson, Morley advises her of

his “home improvement” plans.

Early Friday morning, Sizemore and his team arrive at the address, but by mistake, they
begin work on Erickson’s side of building. Although Erena is home, she does not object
to the work, nor does she inform Sizemore and his crew of the mistake. Midway through
the day, she offers them fresh-squeezed lemonade and ham sandwiches, and they heartily

accept.

Upon completion of the work at 7:00 p.m. Friday evening, Sizemore knocks on Erena’s
door and asks if “the man of the home” is present, that he would like Morley to review
the work and pay the agreed-upon price for the work. Erena chuckles, and “breaks the

news” that the painting crew has made a mistake, one to her benefit. Erickson proclaims
“I do not owe you one dime, because you do not have a contract with me; I will give you

ten minutes to remove yourself and your materials from my property, or I will call the
police.”

Do Erickson and Sizemore have a contract? If so, why? If not, are there any other
theories of recovery available to Sizemore?

13-*

Chapter 13 Case Hypothetical

Contract (Definition):

13-*

A legally enforceable agreement

Elements Required For Contract Formation

13-*

■ Agreement (Offer and Acceptance)

■ Mutual Consideration (Value Given By Both Parties)

■ Legal Purpose and Subject Matter (Object)

■ Legal Capacity (Ability to Understand Terms and Nature of

Contract; legal ability to enter into binding contract)

Defenses to Enforcement of Contract

13-*

■ Lack of genuine assent (fraud, duress, undue influence,

misrepresentation)

■ Lack of proper form requirements (statute of frauds

writing requirement)

The Objective Theory of Contracts

13-*

■ Existence and interpretation of contract based on

outward manifestations of intent by parties (objective,

“reasonable person” standard of contract formation

and interpretation)

■ Subjective (individual) intent generally irrelevant

Sources of Contract Law

13-*

■ State common law

■ The Uniform Commercial Code (Article 2)

■ Governs contracts for the sale of goods

Classification of Contracts:
Bilateral or Unilateral

13-*

■ “Bilateral” Contract: Exchange of promises

■ “Unilateral” Contract: Promise in return for

performance of act

Classification of Contracts:
Express or Implied

13-*

■ “Express” Contract: Based on written or spoken words

■ “Implied” Contract: Based on conduct or actions

■ “Quasi-Contract” (“Implied-in-law” contract): Imposed in

certain cases to avoid unjust enrichment, even if all elements of

contract formation not satisfied

Classification of Contracts:
Valid, Void, or Voidable

13-*

■ “Valid” Contract: All elements of contract formation satisfied

■ “Void” Contract: Illegal purpose/subject matter; unenforceable

■ “Voidable” Contract: One or both parties can withdraw from

contract

Classification of Contracts:
Executed or Executory

13-*

■ “Executed” Contract: All terms of contract fully performed

■ “Executory” Contract: Some duties under contract not

performed by one/both parties

Classification of Contracts:
Formal or Informal

13-*

■ “Formal” Contract: Must meet special form requirements

■ Examples: Contracts under seal, “recognizances,” letters of credit, and

negotiable instruments

■ “Informal” Contract: No formalities required in making; a “simple”

contract

Interpretation of Contracts

13-*

■ Contract interpreted to give effect to parties’ intentions at time they entered
into contract

■ If multiple interpretations possible, adopt interpretation that would make
contract lawful, operative, definite, reasonable, and capable of being effected

■ If contract contains ambiguity, judge should interpret it against interests of
drafter

■ Handwritten provisions prevail over preprinted terms

■ Numbers written in words prevail over numerals

■ Specific terms prevail over general terms

■ Technical words are generally interpreted in accordance with industry standard

Chapter 14

Agreement

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Tom Garrity, Bill Simmons, and Edward Yang were close friends. Their friendship had
developed over their mutual love for vintage stereo equipment, and the three often spent

hours with each other, admiring their electronic collections, monitoring online auctions for
vintage receivers and speakers, and playing music. On several occasions, Edward

expressed his interest in a particular stereo receiver Tom owned, the classic Marantz Model
4400. Edward often told Tom that if he ever wanted to sell the receiver, he would like to be

first considered as the buyer.
Last Saturday morning, Tom and Bill were at Tom’s house. During their conversation, Tom

stated “Bill, I know how much Edward loves my Marantz 4400 receiver, and I have too
much stereo equipment in the house. In fact, Sarah (Tom’s wife) has given me an

ultimatum: Either a good portion of the receivers and speakers go, or I go! I have decided
that I will sell my Marantz 4400 to Edward for $200. It’s worth at least

$600, and it’s the only Marantz receiver that I own, but I’ve decided that I would like to
continue to live in this house, and my wife hasn’t given me any other options except to

sell some of this stuff!”
Later that day, Edward appeared at Tom’s house. Edward enthusiastically proclaimed

“Tom, Bill told me about your offer, and I will take the Marantz 4400 for $200. This is the
classic receiver as far as I am concerned, and I am forever grateful to you! I promise I will
take care of it, and you can have lifetime visitation rights! Oh, and please tell Sarah I said

‘thanks’!”
Tom was perplexed. After his conversation with Bill on Saturday morning, he had

decided to keep the Marantz 4400, and sell all of his other receivers. He knew that his
next statement would test Edward’s friendship: “Edward, I’m sorry, but I have decided not
to sell the Marantz 4400. We can discuss selling any of my other receivers, but the
Marantz is ‘off-limits’.” Edward’s reply? “We have an agreement, Tom.

You made me an offer, and I accepted your offer. Here is the $200. Where is the
receiver?”

Is there a contract between Tom Garrity and Edward Yang?
14-*

Chapter 14 Case Hypothetical

Chapter 14 Case Hypothetical

14-*

Keith Avondale is in the market for a new “big screen” flat-panel television. While

reviewing the Sunday newspaper, he notices a full-page advertisement from “Transistor

Town.” The advertisement includes a 45-inch flat-panel television for

$299. Surprised by the remarkably low price, and eager to purchase his new luxury item,

Avondale makes plans to “open the store” on Monday morning.

Avondale is the first customer to arrive at the store on Monday, waiting outside when

the front doors open. He rushes into the store and announces to the first sales

representative he sees, “I will take a 45-inch flat-panel television for $299!”

The sales representative immediately refers Avondale to the store manager, who directs

Avondale to his office. The store manager explains to Avondale that the advertisement

was an unfortunate mistake, resulting from miscommunication between Transistor

Town and the newspaper publisher. The manager goes on to say that the intended

advertise price was $2,999, but that he would be willing to sell the described television

to Avondale for $2,449, Transistor Town’s cost for the television. Avondale objects,

demands that Transistor Town sell the television for

$299, and informs the store manager that his brother is a trial lawyer.

Who wins?

Elements of a Valid Offer

14-*

■ Manifestation of offeror’s intent to be bound

■ Intent determined by objective, “reasonable person” standard

■ Preliminary negotiations and advertisements do not constitute
offers

■ Definite and certain terms (including subject matter, price,
quantity, quality, and parties)

■ Communication of offer to offeree (or offeree’s agent)

Auctions

14-*

■ Auction With Reserve

■ Seller merely expresses intent to receive offers

■ Auctioneer (as representative of seller) may withdraw
item from auction at any time before “hammer falls”

■ Before hammer falls (signaling acceptance of
offer), bidder/offeror may revoke bid

■ Auction Without Reserve

■ Seller must accept highest bid

Termination of Offer

14-*

■ Revocation

■ Rejection

■ Counteroffer

■ Death/Incapacity of offeror

■ Destruction of subject matter of offer

■ Subsequent illegality of subject matter of

offer

■ Lapse of time

■ Failure of condition(s) specified in offer

Acceptance

14-*

■ Definition: Representation of offeree’s intent to be bound by terms of
offer

■ Silence generally does not constitute acceptance

■ Terms of acceptance must be identical to terms of offer (“Mirror-
Image” Rule)

■ Effective when communicated by offeree to offeror

■ If no method of communicating acceptance specified in offer, any
reasonable means of acceptance effective (Examples: telephone, mail,
fax, e-mail)

The Mailbox Rule

14-*

Acceptance by mail effective when placed
in mailbox; however, revocation of offer
effective only when received by offeree

Chapter 15

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Consideration

Chapter 15 Case Hypothetical

15-*

Seattle Shoestring Sales, Inc. arranged to sell shoestrings to Victory, Inc., a tennis shoe

manufacturer. According to the terms of the deal, Seattle Shoestring Sales committed to

sell Victory whatever number of shoestrings it will produce next year, at seventy-five

cents per pair.

Since entering into their agreement, the price of cotton has skyrocketed five hundred

percent. To produce shoestrings, Seattle Shoestring Sales’ cost alone will be

approximately $1.50 per pair. Seattle Shoestring Sales has informed Victory that it cannot

and will not honor the deal.

Is there an enforceable contract between Seattle Shoestring Sales, Inc. and Victory, Inc.?

Is the failure to include a quantity term in the agreement fatal to its enforceability? What

about the fact that the price of cotton dramatically increased after the companies

reached their agreement? Should a court or other arbiter increase the per-pair contract

price to account for the increase in the price of cotton, and then enforce the agreement?

Chapter 15 Case Hypothetical and Ethical Dilemma

15-*

John Harrington, Jr. (“Junior”) is a 24-year-old, 3-pack-per-day smoker. John Harrington,

Sr. (“Senior”) is a very concerned parent. On January 1, father announces to son, “Junior,

if you will stop smoking for the entire year, I will pay you $5,000.” Senior believes that

if Junior will stop smoking for one year, he will “kick the habit.” Junior reluctantly

accepts his father’s terms, and extinguishes his half-smoked cigarette with the heel of

his boot.

On January 1 of the following year, Junior approaches Senior and says “Dad, time to

pay up.” Senior has no reason to doubt that Junior has refrained from smoking for an

entire year, but states “Son, this was for your benefit. The gift I have given you is the

gift of life, and you are now likely to enjoy that gift longer, because you are now much

less likely to contract cancer. Health statistics show that non- smokers live ten years

longer than smokers. Enjoy your newfound life, but I will not pay you the $5,000.”

Does Senior owe Junior the $5,000? Is there an enforceable contract between father and

son? If there is not an enforceable contract, does Junior have any other legal or equitable

theory of recovery? Is Senior ethically obligated to pay Junior the $5,000?

Consideration

(Definition):

15-*

Something of value, given in exchange for
something else of value, that is the product

of a mutually bargained-for exchange

Examples of Consideration

15-*

■ Benefit to promisor

■ Detriment to promisee

■ Promise to do something

■ Promise to refrain from doing

something

Rules of

Consideration

15-*

■ For a promise to be enforced legally, there must be consideration

■ Exception—Promissory Estoppel:

■ One party makes promise knowing other party will rely on it

■ Other party relies on promise (“actual reliance”)
■ Justice dictates enforcement of promise, even though it is not

supported by consideration

■ Court rarely considers adequacy of consideration

■ Illusory promise does not constitute consideration

■ Past consideration does not constitute consideration for purposes of present contract

■ Promise to do something you are already legally obligated to do is not valid
consideration (“Pre- existing duty rule”)

Uniform Commercial Code:
Requirement and Output Contracts

15-*

■ “Requirement” Contract

■ Buyer agrees to purchase all goods needed/required from

designated seller

■ “Output” Contract

■ Seller agrees to provide all it produces to designated buyer

■ No quantity specification necessary in either requirement or output

contract

■ For both requirement and output contracts, parties must act in “good faith”

Partial Payment of Debt

15-*

■ Liquidated Debt: No dispute as to amount of money owed

■ Unliquidated Debt: Parties either (in good faith) dispute fact money owed, or
dispute amount of money owed

■ “Accord and Satisfaction” Requirements (“Accord” represents agreement,
“satisfaction” represents payment; accord and satisfaction means partial
payment of disputed debt discharges remaining balance allegedly owed):

■ Unliquidated debt

■ Creditor agrees to accept, as full payment, less than creditor claims owed

■ Debtor pays agreed-upon amount

Chapter 16

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Capacity and Legality

Chapter 16 Case Hypothetical and Ethical Dilemma
Before her recent accident, eighty-two-year-old Lily Ledbetter was her own chauffeur. She used to

drive an automobile to fulfill her once-active senior lifestyle, including outings for bridge
tournaments, water aerobics, grocery shopping, bill-paying, and family get-togethers.

One day, Lily decided to purchase a new automobile. Although her fifty-year-old son Ron suggested
that he accompany her to the car dealership, she refused, reminding him that she was fully capable of
taking care of her own responsibilities. With the “wind of independence at her back,” Lily entered the

dealership, Bjorn Fjord Motors, alone.

After negotiating her best deal and signing a contract for the purchase of a new Fjord Mastodon sedan,
Lily drove away in her rapidly-depreciating asset. Five miles down the road, the steering wheel
detached from the steering column (the steering wheel literally came off in her hands) and Lily

crashed into a culvert. She sustained severe personal injuries, including (but not limited to) a broken
left leg, a broken pelvis, a collapsed lung, and numerous lacerations to her face. Her attending

physicians agree that Lily will never be able to drive an automobile again.

Lily has since sued Fjord Motors, Inc. (the manufacturer of the sedan) and Bjorn Fjord Motors, Inc.
(the dealership) for personal injury. Both companies have filed answers denying liability on the basis

of an exculpatory clause included in Lily’s purchase contract. The exculpatory clause states that
neither Fjord Motor, Inc. nor Bjorn Fjord Motors, Inc. is responsible to a customer or any other third
party for a defect in the Fjord Mastodon that results in personal injury and/or economic harm. Both

companies have also filed motions for judgment on the pleadings, requesting that the court summarily
dismiss both causes of action against Fjord Motors, Inc. and Bjorn Fjord Motors, Inc. on the basis of

the contract’s exculpatory clause.

Should the court grant the defendants’ requests for judgment on the pleadings? Is the exculpatory
clause enforceable against Lily Ledbetter?

16-*

Chapter 16 Case Hypothetical and Ethical Dilemma

16-
*

Tommy McCartney is a sixteen-year-old high school student. He has worked forty

hours per week at the local convenience store over the last year, and has diligently saved

$6,000 for the purchase of his first car.

While visiting a local car dealership, Tommy finds the “car of his dreams,” a used

yellow Camaro. Tommy walks into the dealership, announces to the dealership owner

that he is “ready to buy,” negotiates $6,000 as the purchase price, and leaves the

dealership a proud car owner.

Over the course of the next six months, Tommy drives the Camaro eight thousand miles,

wears the tires thin, dents the left front fender, and regrets his purchase. He realizes that

in two short years college will beckon, and he knows that his parents cannot afford to

pay for his higher education. In short, he wants his money back.

On a Saturday morning, Tommy returns to the car dealership, walks into the sales office,

and hands the keys to the seller, asking for the return of his $6,000. The dealer chuckles,

and then his look turns stern, saying “Son, I don’t owe you anything. You’ve just learned

a lesson in the ‘School of Hard Knocks.’ The car is still yours, and the money is still

mine!”

Who will prevail? Is it legal and/or ethical to allow Tommy to escape his

contractual obligations?

Contractual Capacity
(Definition):

16-*

Mental ability to understand rights and obligations
established by contract, with the presumptive ability

to understand how to comply with terms of
agreement

Contractual Capacity

16-*

General Rule of Law: Natural persons over the age
of majority (18 in most states) are presumed to have

the full legal capacity to enter into binding legal
contracts

Individuals Who Have Only Limited Capacity to
Contract

16-*

■ Minors

■ Those suffering from mental deficiency that renders

them incapable of understanding the nature and

obligations of contracts

■ Those who are intoxicated

Rules Regarding Minor’s “Contractual Power of Avoidance”

16-*

Disaffirmance (“Power of Avoidance”): Minors’ right, until reasonable time

after reaching age of majority, to disaffirm/avoid their contracts

■ To exercise right, minor need only demonstrate, through words

and/or actions, intent to rescind contract

■ Minor must return any consideration received (if still in minor’s

possession/control), regardless of condition

■ Even if consideration damaged/destroyed, other party has no

recourse against minor

■ Rules designed to discourage competent parties from entering into

contracts with minors

Exceptions to Minor’s Right to Disaffirm
Contract

16-*

■ Contract for Necessaries (Definition): Contracts that supply minor with basic
necessities of life

■ Examples: food, clothing, shelter, basic medical services

■ Ratification (Definition): Acceptance of terms of contract (entered into as a
minor) after reaching age of majority

■ Express Ratification: Occurs when, after reaching age of majority, individual
states (either orally or in writing) that he/she intends to be bound by contract
entered into while a minor

■ Implied Ratification: Occurs when former minor takes action after reaching age
of majority consistent with intent to ratify contract

Parental Liability for Minors’ Contracts,
Necessaries, and Torts

16-*

■ General Rule: Parents not liable for contracts entered into by
their minor children

■ Exception: Contracts for necessaries

■ General Rule: Parents not liable for torts committed by their
minor children

■ Exception: Failure to properly supervise child, subjecting
others to unreasonable risk of harm from the child

Individuals Having N o Capacity to Contract

16-*

■ Those adjudicated insane

■ Those adjudicated habitually intoxicated

■ Those with appointed legal guardians

Rules Regarding Intoxication

16-*

■ General Rule: Contracts made by intoxicated persons are

voidable

■ If intoxication merely causes person to exercise poor judgment,

contract not voidable unless other party unfairly capitalized on

the impaired judgment

■ When intoxicated person becomes sober, contract can be ratified

or disaffirmed; however, courts will liberally interpret behavior

that seems likes ratification once intoxicated person becomes

sober

Illegal Contracts

16-*

■ Contracts with no legal purpose and/or subject matter

■ Example: Agreement to commit crime/tort

■ Contracts violating statute(s) and/or “public policy”

■ Example: Usurious loan agreement (loan contract exceeding state-
imposed maximum interest rate)

■ Example: Unconscionable contract (Agreement so unfair that it is “void
of conscience”)

Chapter 17

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Legal Assent

Chapter 17 Case Hypothetical and Ethical Dilemma

17-*

John Hammonds recently purchased a used Fjord Mastodon sedan from Square Deal

Pre-Owned Auto Sales, Inc. During contract negotiations, John did not ask any

questions related to the fuel efficiency of the car, and Square Deal’s sales representative,

Wink Eubanks, did not volunteer any information about the Mastodon’s gas mileage.

John had saved for a car for five (5) years, and he paid ten thousand dollars cash for the

vehicle.

After his purchase, John kept meticulous records regarding the fuel consumption of the

Mastodon, and he calculated that the Mastodon was getting approximately twelve (12)

miles per gallon. He immediately returned to Square Deal (John thought the dealership

should be renamed “Raw Deal”), found Wink Eubanks in front of one of the store’s

vending machines, and stated “You should have told me that Mastodon only gets

twelve miles per gallon. I am the victim of fraud, and I want my money back. Here are

the keys to your Mastodon with the mammoth appetite!”

Do you agree with John Hammonds? Is John the victim of fraud? Is he entitled to a

rescission of the contract based on Square Deal’s nondisclosure of the Mastodon’s gas

mileage?

Chapter 17 Case Hypothetical and Ethical Dilemma

17-*

For Greta Harrington and her husband Robert, it was love at first sight. The two were

married for 52 years until cancer took her husband at the age of 84. Greta is currently 83

years old, and her marriage produced three offspring: Samuel, 50 years old; Katherine, 45

years old; and Benjamin, 40 years old. In his will, Robert left all of his financial interests,

a considerable sum valued at $5 million, entirely to his wife; in his will, he also

expressed love and affection for his three children, as well as the desire that Greta devise

the remainder of the couple’s estate to their children, in equal portions, upon her death.

Greta has recently been “keeping company” with Gary Watson, a twice-divorced, 65-

year-old bachelor with a reputation for “womanizing.” While visiting her mother one

weekend, Katherine is shocked to see a fully-executed will on the desk in the living

room, devising all of her mother’s estate to Gary Watson. She immediately calls Samuel

and Benjamin, schedules an emergency “sibling meeting” for Sunday, and wonders

what to do about her mother’s ill- advised decision. She has noticed in recent months

that her mother is often forgetful, frequently calls her “Sharon” (her aunt’s name,) and

often confuses the days of the week.

Do the children have any legal rights in terms of successfully invalidating Greta

Harrington’s will? From a legal and/or ethical standpoint, should a mother (even of

adult children) be allowed to “disinherit” her offspring?

Legal Assent

17-*

■ Definition: Promise to buy or sell courts will require parties to obey

■ Without assent, contract may be avoided/rescinded

■ Cancellation of contract due to lack of assent means party with power of
avoidance can require return of consideration given to other party; similarly,
party with rescission right must return consideration received from other party

■ Major “obstacles” to legal assent: Mistake, misrepresentation, undue influence,
duress, and unconscionability

Mistake

17-*

■ Definition: Erroneous beliefs regarding material facts of

contract at time agreement made

■ Unilateral Mistake: Mistake made by one contracting party;

generally, contract still binding

■ Mutual (Bilateral) Mistake: Mistake made by both parties; if

mutual mistake of material (significant) fact, either party can

rescind contract

Fraudulent or Negligent Misrepresentation

17-*

■ Fraudulent Misrepresentation (Definition): Intentional, untruthful assertion of
material fact by contracting party; aggrieved party can rescind contract, and sue for
damages

■ Negligent Misrepresentation (Definition): Negligent, untruthful assertion of material
fact by contracting party; aggrieved party can rescind contract, and sue for damages

■ Contrast with “innocent misrepresentation”, when party making false assertion
believes it to be true, and is not negligent in making false assertion; although
innocent misrepresentation permits misled party to rescind contract, he/she
cannot sue for damages

■ Courts permit contract rescission for fraudulent or negligent misrepresentation,
assuming:

■ False assertion

■ Intent to deceive, or negligence

■ Justifiable reliance on false assertion by innocent party

Undue Influence

17-*

■ Definition: Persuasive efforts of dominant party, who

uses special relationship to interfere with other’s free

choice of terms

■ Any relationship involving one party’s unusual degree

of trust in another can give rise to undue influence

Questions Affecting Determination of
Undue Influence

17-*

■ Did dominant party “rush” the other party to consent?

■ Did dominant party gain unjust enrichment from the contract?

■ Was non-dominant party isolated from other advisers at time of
contract?

■ Is contract unreasonable, in that it overwhelmingly benefits
dominant party?

Duress

17-*

■ Definition: Occurs when one party threatens other with

wrongful act unless assent given

■ Duress is not legal assent, since coercion interferes with

contracting party’s free will

■ For courts to rescind agreement, injured party must prove duress

left no reasonable alternatives to contractual agreement

Situations Involving Duress

17-*

■ One party threatens physical harm or extortion to gain consent
to contract

■ One party threatens to file criminal lawsuit unless consent given
to terms of contract

■ One party threatens to file frivolous civil lawsuit unless consent
given to terms of contract

■ One party threatens the other’s economic interests (although in
many jurisdictions, recovery based on economic duress/pressure
rarely granted)

Unconscionability

17-*

■ Definition: Occurs when one party has so much relative

bargaining power that he/she effectively dictates terms of

contract, resulting in situation where dominated party, in essence,

lacks free will

■ Unconscionable contract is an “adhesion contract”, and cannot

be basis for avoiding contract

Chapter 33

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Agency Formation and

Duties

Chapter 33 Case Hypothetical

33-*

Robert “Red” Newman, attorney-at-law, just attended a pretrial conference for a trial

scheduled to begin next week. The case, Effingham v. Atwater, involves his client,

Jessica Effingham. On September 8, 2009, Jessica sustained serious injuries in

automobile accident when a car driven by Harvey Atwater (the defendant) struck her car

from behind. Jessica sustained permanent partial disability as a result of the accident,

and Red believes the case is worth $250,000 for his client’s permanent partial disability,

pain and suffering, medical expenses, and other compensatory/consequential damages.

During the pretrial conference, Atwater’s defense counsel, Gunner Vader, offered the

plaintiff $20,000 in full and final settlement of the Effingham v. Atwater litigation.

Attorney Vader proclaimed that $20,000 was all of the settlement authority he had, and

his client would not pay a penny more to settle the case.

Judge Clarence Ginsburg strongly recommended that the plaintiff take the $20,000

settlement offer, but Red considered the “low-ball” offer to be a personal insult as well

as an affront to his client, and he immediately rejected the offer.

In rejecting the offer, did Robert “Red” Newman violate his professional duty as his

client’s agent?

Chapter 33 Case Hypothetical and Ethical Dilemma

Maximillian Snell is having a very bad Monday at his “pre-owned” car dealership,

Maximillian Motors. Known county-wide for his “eye-catching” (some would say

obnoxious) television advertisements (with staged customers proclaiming “Thanks a

million, Maximillian!”) Snell is having a difficult time attracting and retaining an

effective and reliable sales staff; in fact, not a single salesperson has appeared for

work on Monday. The only employee who does shows up for work that day is his

secretary of three years, Daisy Martinez, whose responsibilities include processing

“tax, title and tag” paperwork after the sale.

Business is slow that Monday, with only two “window shoppers” appearing on the

lot from 8:00 a.m. to 2:00 p.m. Famished, and eager to try out the new Italian

restaurant down the street, Snell instructs Martinez to tell any prospective customers

he will return at 3:30 p.m.

When Snell returns at 3:30, he asks Martinez whether any potential customers

visited the lot in his absence. Daisy beams with pride, and says “why yes, Max,

there was a young couple who came by right after you left. They wanted to buy that

red BMW sedan on the front row, and I knew business was slow, so I went ahead

and sold it to them. The contract is here on my desk. Aren’t you proud of me?!”

33-
*

Curious, Maximillian examines the contract. It describes the red BMW sedan,

and includes the signatures of both purchasers, as well as Daisy’s signature

(indicating “Daisy Martinez, for Maximillian Motors.”) The contract price is

$21,000. Maximillian’s face reddens as he heads for the car inventory purchase price

records on his computer. Computer

records reflect that he purchased the car at auction last Wednesday for $28,000, and

that his established retail price for the car was $31,000. When he confronts Daisy

with the facts, she bursts into tears, saying “please boss, don’t fire me, I’ve made a

terrible mistake!” Daisy is inconsolable, but that is irrelevant to Snell; he is not

exactly in the mood for consoling.

Through her tears, Daisy indicates that the couple will return at 5:30 p.m. to take

possession and ownership of the car; they have gone to their bank to retain the

$21,000.

Is Snell legally obligated to sell the car to the couple? From an ethical

standpoint, should the couple agree to pay at least Snell’s cost for the car

($28,000?)

Introduction to Agency Law

33-*

■ Agency: Relationship between principal and agent

■ Agent: One authorized to act for/on behalf of principal

■ Principal: One who hires agent to represent him/her

■ Fiduciary: One with duty to act primarily for another person’s

benefit

Creation of Agency Relationship

33-*

■ Expressed Agency: Agency formed by making written/oral agreement

■ Power of Attorney: Document giving agent authority to sign legal documents
on behalf of principal

■ Durable Power of Attorney: Power of attorney intended to continue to be
effective/take effect after principal incapacitated

■ Agency By Implied Authority: Agency formed by implication, through
conduct of parties

■ Agency By Estoppel: Agency formed when principal leads third party to
believe that another individual serves as his/her agent (although principal had
actually made no agreement with purported agent)

■ Agency By Ratification: Agency that exists when individual misrepresents
himself/herself as agent for another party, and principal accepts/ratifies
unauthorized act

Requirements for “Agency By Ratification”

33-*

■ Individual must misrepresent himself/herself as agent for

another party

■ Principal accepts/ratifies unauthorized act

■ Principal has complete knowledge of all material facts regarding

contract

■ Principal must ratify entirety of agent’s act

Agency Relationships

33-*

■ Agency Relationship: Fiduciary relationship (relationship of trust) in which
agent acts on behalf of principal

■ Principal-Agent Relationship: Employer hires employee to enter into
contracts on behalf of employer; parties have agreed that agent will have
power to bind principal in contract

■ Employer-Employee Relationship: Employer hires employee to perform
certain tasks; employer has right to control conduct of employees

■ Employer-Independent Contractor Relationship: Employer hires persons
(other than employee) to conduct some sort of task; employer has no control
over details of conduct of independent contractor

Exhibit 33-3: Independent Contractor or
Employee?

33-*

■ Does worker engage in distinct occupation/independently established
business?

■ Is work done under employer’s supervision, or does specialist without
supervision complete the work?

■ Does employer supply the tools?

■ What skill is required for the occupation?

■ What is the length of time for which worker employed?

■ Is worker a regular part of the employer’s business?

■ How is worker paid?

Principal’s Duties To Agent

33-*

■ Compensation

■ Reimbursement and Indemnification

■ Cooperation

■ Safe Working Conditions

Agent’s Duties To Principal

33-*

■ Loyalty

■ Notification

■ Performance

■ Obedience

■ Accounting

Principal’s Rights and Remedies Against Agent

33-*

■ Constructive Trust

■ Avoidance

■ Indemnification

Agent’s Rights and Remedies Against
Principal

33-*

■ Tort and Contract Remedies

■ Demand For An Accounting

■ Specific Performance

Chapter 34

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Liability to Third Parties

and Termination

Chapter 34 Case Hypothetical and Ethical Dilemma

34-*

Jonathan A. Jacobs has worked diligently all of his life, saved every penny he could, and

is now worth an estimated $2 million. Advanced in his years (he is now seventy-nine

years old), Jonathan recently executed a general power attorney naming his son, Willard

T. Jacobs, as his “attorney-in-fact” (an attorney-in-fact is the agent named in a power of

attorney relationship.)

Jonathan has recently been dating Mildred Eubanks, who is fifty-seven years old.

Concerned that Mildred is a “gold-digger” and that she will abscond with the majority (if

not all) of his father’s wealth, Willard created a trust, with the “corpus” (body) of the trust

amounting to

$1.75 million (the majority of his father’s wealth.) Willard named himself as the trustee,

and he designated his two children (Jonathan’s grandchildren), Tobias and Heather, as

co- beneficiaries of the trust. When he created the trust, Willard did not notify his father.

Upon discovering the existence of the trust, Jonathan became furious. “How dare you go

behind my back and steal my money. I worked hard for that money, it is mine, and I have

the right to decide what to do with it. If I choose to give all of the money to my dear

friend Mildred, that is my decision!”

In exercising the general power of attorney, did Willard T. Jacobs act appropriately?

Upon Jonathan A. Jacobs’s request, should a court invalidate the trust?

Chapter 34 Case Hypothetical

The law firm of Poe, Patterson and Henderson, a general partnership, represents 20 plaintiffs in a

class- action product liability lawsuit, with trial scheduled to begin Monday of next week. It will

be the biggest trial in the history of the firm, and the partners understand that success will depend,

for the most part, on a collaborative effort on the part of all professionals at the firm, including

partners, associate attorneys, paralegals, and secretarial staff. It is the Friday before the trail, and

there will be no weekend for those working at Poe, Patterson and Henderson.

The partners and the associate attorneys are reviewing depositions in the conference room. The

clock on the wall shows 11:00 p.m. Partner Henderson turns to a first-year associate, J. Benjamin

Fotheringham, and says “Ben, how about going to Donovan’s Delicatessen and picking up a few

subs for all of us? Here’s

$100.” Donovan’s Delicatessen is a favorite of the firm for “late-night” trial preparation

sustenance, and is located approximately two miles away, down Chestnut Avenue.

Eager to make a positive impression on senior partner Henderson, and ready to escape the “tunnel-

vision” brought on by twelve hours of deposition review, Ben heads for his car. In a rush to

complete the “deli run” quickly, Ben accelerates his car to 50 miles per hour. The posted speed

limit on Chestnut Avenue is 35 miles per hour.

Fidgeting with his compact disc player in order to listen to an audio-recorded deposition, Ben

inadvertently crosses the center line and collides with an oncoming automobile operated by

Brandi Kernigan. Ms. Kernigan is severely injured, and experiences $22,000 in medical

expenses; her $25,000 Volkswagen is a total loss. She sues Fotheringham individually, and the

law firm partnership of Poe, Patterson and Henderson. Kernigan also lists Poe, Patterson and

Henderson as individual defendants.

Is the law firm of Poe, Patterson and Henderson liable for Brandi Kernigan’s injuries? Are Poe,

Patterson and Henderson individually liable for Kernigan’s injuries?

34-*

Authority of Agent and Liability of Principal

34-*

■ Express Authority: Principal explicitly instructed agent to
perform act

■ Implied Authority: Relationship inferred from actions/conduct
of parties; authority inferred from nature of relationship

■ Apparent Authority and Estoppel: Third party reasonably
believes (based on actions of principal) that agency relationship
exists between principal and another individual

Contractual Liability of Principal and Agent
For Authorized Agent Acts

34-*

“Authorized” Acts: Agent acts within scope of agent’s authority;

■ Classification of Principal: Must be classified as either disclosed, partially
disclosed, or undisclosed

■ Disclosed Principal—Agent not liable, principal liable

■ Partially Disclosed Principal—Agent possibly liable, principal liable

■ Undisclosed Principal—Agent liable, principal liable

Contractual Liability of Principal and Agent for Unauthorized Agent
Acts

34-*

“Unauthorized” Acts: Acts that go beyond scope of agent’s authority

■ Third Party Reasonably Believes Agent Has Authority:

■ Agent liable

■ Principal not liable

■ Third Party Believes Agent Mistaken About His/Her Authority:

■ Agent not liable

■ Principal not liable

Tort Liability and the Agency Relationship

34-*

■ Agent’s Tortious Conduct—Principle directly responsible if:

■ Principal directs agent to commit tortious act; or

■ Principal fails to provide proper instruments, tools, or adequate
instructions

■ Agent Misrepresentation—If agent misrepresents himself/herself to third
party, principal may be tortiously liable for agent’s misrepresentation

■ Respondeat Superior—Principal/employer liable if employee wrongfully
injures third party (not because he/she personally at fault, but because he/she
negligently hired agent)

Questions Regarding “Course and Scope” of Employment

34-*

■ Did employer authorize employee’s act?

■ Did act occur within time and space limits of employment?

■ Was act performed (at least in part) on behalf of employer?

■ To what extent were employer’s interests advanced by act?

■ To what extent were private interests of employee involved?

■ Did employer provide the means by which act occurred?

■ Did employee use force that employer did not expect?

■ Did employer know that act would involve commission of crime?

Principal’s Liability and the
Independent Contractor

34-*

General Rule: Individual who hires independent
contractor not liable for independent contractor’s

tortious actions under doctrine of “respondeat
superior”, unless contractor engages in hazardous

activities

Crime and Agency Relationships

34-*

■ If agent commits crime, agent liable for crime

■ If agent commits crime in scope of employment without

authorization of principal, principal not liable for agent’s crime

■ Principal liable for agent’s crime if principal authorized agent’s

criminal act

Termination of Agency Relationship

34-*

Termination By Acts of Parties

■ Lapse of Time

■ Fulfillment of Purpose

■ Occurrence of Specific Event

■ Mutual Agreement

■ Revocation of Authority

■ Renunciation By Agent

Termination of Agency Relationship

■ War

34-*

Termination By Operation of Law

■ Death (Of either principal or agent)

■ Insanity (Of either principal or agent)

■ Bankruptcy (Of either principal or agent)

■ Change in Circumstances

■ Change in Law

■ Impossibility of Performance

■ Disloyalty of Agent

Chapter 35

Forms of Business

Organizations

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 35 Ethical Dilemma

35-*

As this chapter indicates, a corporation is a legal construct with an identity separate and

apart from its owner(s). The primary legal advantage to converting one’s business from

an unincorporated enterprise to the corporate form is the ability to avoid personal

liability for the business’s financial obligations. Since the corporation is distinguishable

from its owner, the owner’s personal assets cannot be seized to satisfy business

indebtedness. This effectively means that an owner can “crash and burn” a corporation

financially, bankrupt the business, and walk away from the “flaming wreckage” of the

corporation without personal obligation for business debts.

Is it ethical for an owner to use the corporate entity to avoid personal obligation for

business debts?

Chapter 35 Case Hypothetical

Allison Seizer has a very wealthy father, entrepreneur Warren Seizer of “Chimichonga Chime”
restaurant fame, although her family pedigree was not what attracted Blake Patterson to his girlfriend
of three years; instead, it was “love at first sight.” Blake proposes to Allison, and the two are married

with the blessing of Warren Seizer.
Warren wants the best for his daughter and son-in-law, so he offers a “Chimichonga Chime” franchise

to Blake, with a prime location in the center of the Elmwood business district. After one year, it is
clear that the newest “Chimichonga Chime” is and will be a tremendous business success. In fact,
sales, revenue and profit goals for the restaurant are shattered in its first year of operation, and Blake

would like to think that his “hands-on” ownership and operation of the restaurant was an important part
of the store’s success.

Unfortunately, the couple’s relationship has suffered over the year, and the term “irreconciliable
differences” creeps into marriage conversations. Blake asks for his freedom, and Allison obliges.

Wedding bells have been replaced by divorce attorneys.
Warren Seizer is furious. He is firmly convinced that Blake Patterson is to blame for the marriage’s

dissolution, because there is no conceivable way (at least in his mind) that his “darling angel,”
his “precious daughter,” could be responsible for the divorce. The creative genius behind

“Chimichonga Chime” plots justice for his daughter and himself, although some may call it
revenge.

On September 1, Warren Seizer personally delivers a Notice of Termination of Franchise to Blake
Patterson. The document states that Patterson’s franchise agreement has been terminated for cause,
and that he must either close the restaurant, or cease and desist from using the name “Chimichonga
Chime,” advertising the franchise chime logo, and selling all franchise-related products, within 30

days.

Who wins: The “ex-father-in-law,” or the “ex-son-in-law?”

35-*

Major Forms of Business Organizations

35-*

■ Sole Proprietorship

■ General Partnership

■ Limited Partnership

■ Corporation

Sole Proprietorship

35-*

■ Definition: Unincorporated business owned by one person

■ Owner has total control

■ Owner has unlimited liability

■ Profits taxed directly as income to sole proprietor

Advantages and Disadvantages of Sole
Proprietorship

35-*

■ Advantages

■ Ease of creation (“start-up”)

■ Owner has total managerial control

■ Owner retains profits

■ Disadvantages

■ Personal liability for all business debts/obligations

■ Funding limited to personal contributions and loans

General Partnership

35-*

■ Definition: Unincorporated business owned and operated by

two or more persons

■ Each partner has equal control of business

■ Each partner has unlimited, personal liability for business

debts/obligations

■ Profits taxed as income to partners

Advantages and Disadvantages of
Partnership

35-*

■ Advantages

■ Ease of creation (“start-up”)

■ Partnership income is partner income

■ Business losses qualify for tax deduction

■ Disadvantages

■ Personal liability for all business debts/obligations, including those
incurred by other partners on behalf of partnership

Limited Partnership

35-*

■ Definition: Unincorporated business with at least one general
partner, and one limited partner

■ General partner in limited partnership has
managerial/operational control over business

■ Limited partner’s liability limited to extent of his/her capital
contributions

■ Limited partner has no managerial/operational control over
business

Corporation

35-*

■ Definition: State-sanctioned business with legal identity separate
and apart from its owners (shareholders)

■ Owners’ (shareholders’) liability limited to amount of investment
in corporation

■ Profits taxed as income to corporation, plus income to
owners/shareholders (“double-taxation”)

■ “S” Corporation can avoid double-taxation

Advantages and Disadvantages of
Corporation

35-*

■ Advantages

■ Limited liability for shareholders

■ Ease of raising capital by issuing (selling) stock

■ Disadvantages

■ “Double-taxation”

■ Formalities required in establishing and maintaining corporate existence

“S” Corporation

35-*

■ Definition: Business organization formed under federal tax law
that is considered corporation, yet taxed like a partnership

■ Formed under federal law

■ No more than seventy-five shareholders

■ Shareholders must report income on their personal income tax
forms

Limited Liability Company (LLC)

35-*

■ Definition: Business organization with limited liability of a
corporation, yet taxed like partnership

■ Formed under state law

■ Owners of LLC (“members”) pay personal income taxes on
shares they report

■ No limitation on number of owners permitted in LLC

Specialized Forms of Business
Organizations

35-*

■ Cooperative—Organization formed by individuals to market products

■ Joint stock company—Partnership agreement in which company members hold
transferable shares, while all company goods are held in names of partners

■ Business Trust—Business organization governed by group of trustees, who operate
trust for beneficiaries

■ Syndicate—Investment group that forms for purpose of financing specific large
project

■ Joint Venture—Relationship between two or more persons/corporations created for
specific business undertaking

■ Franchise—Agreement between “franchisor” (owner of trade name/trademark) and
“franchisee” (person who, by specific terms of agreement, sells goods/services under
trade name/trademark)

Advantages and Disadvantages of Franchise
(To Franchisee)

35-*

■ Advantages

■ Assistance from franchisor in starting franchise

■ Trade name/trademark recognition

■ Franchisor advertising

■ Disadvantages

■ Must meet contractual requirements, or possibly lose franchise

■ Little/no creative control over business

Advantages and Disadvantages of Franchise
(To Franchisor)

35-*

■ Advantages

■ Low risk in starting franchise

■ Increased income from franchises

■ Disadvantages

■ Little control (except contractually) over individual franchise

■ Can become liable for franchise, if franchisor exerts too much control

Types of Franchises

35-*

■ “Chain-Style” Business Operation

■ Franchisor helps franchisee establish a business (using franchisor’s
business name, and franchisor’s standard “methods and practices”)

■ Distributorship

■ Franchisor licenses franchisee to sell franchisor’s product in specific area

■ Manufacturing Arrangement

■ Franchisor provides franchisee with technical knowledge to manufacture
franchisor’s product

Top Ten Global Franchises (2009)

■ Subway

■ McDonald’s

■ Liberty Tax Service

■ Sonic Drive In Restaurants

■ Intercontinental Hotels

Group

35-*

■ Ace Hardware Corp.

■ Pizza Hut

■ UPS Store

■ Circle K

■ Papa John’s International,

Inc.

Chapter 36

Partnerships: Nature,

Formation, and

Operation

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 36 Case Hypothetical

36-*

The accounting firm of Cooper, Anderson and Young had fallen on “hard times” in recent

months. Several clients had left the firm, and in a slow economy, it was difficult to generate new

clients. Cooper, Anderson and Young was a general partnership with three (3) partners (Andrew

Cooper, Thomas Anderson, and Marvin Young), and six (6) employees (four associate

accountants, an office manager, and a secretary/receptionist).

Meeting payroll was especially challenging for the partnership this month. In order to compensate

the firm’s employees, Marvin Young went to The Bank of the Americas and obtained a $23,000

business loan, signing his name to the loan agreement as well as the name of the partnership.

Marvin used the proceeds of the loan to compensate the employees their full monthly salaries.

Upon discovering what Marvin had done, Andrew and Thomas were furious. Both felt that since

the firm had experienced a financial downturn, the employees should have to take a substantial

reduction in their salaries for the month, or forego their salaries for the month altogether (Andrew,

Thomas, and Marvin had not received any profit distribution for the current month; their partnership

agreement did not provide for partner salaries, and even if it had, there were no other monies to

distribute). Further, Andrew and Thomas were concerned about partnership liability for the $23,000

loan, as well as their own personal liabilities for the loan.

Is the general partnership Cooper, Anderson and Young responsible for the $23,000 loan? Are

Andrew Cooper and Thomas Anderson personally liable for the loan?

Chapter 36 Case Hypothetical

The year 2002 was a nightmare for James Littleton. In January 2002, Littleton was diagnosed with
“Type 2” (adult onset) diabetes; in June, Littleton’s physician expressed concern with the lack of
circulation in his left leg, and in October, a circulatory specialist recommended that the left leg be

amputated to the knee; reluctantly but resigned to his fate, James agreed.
On November 1, Littleton was admitted to Pinecrest General Hospital for surgery. In what can

only be described as a horrible and catastrophic mistake, the surgeon misreads the diagnosis and
surgical instructions, and amputates Littleton’s right leg by mistake. Littleton’s left leg is

amputated the next day.
Confined to a wheelchair, but supported by the love, care and concern of his family, Littleton is

taken to a local Pinecrest law firm, Stephenson, Gordon, and Ratcliff, a general partnership.
Stephenson and Gordon agree to represent Littleton in the medical malpractice lawsuit, and sign a

contract of representation with Littleton, agreeing to represent him for the standard one-third
contingency fee, plus associated expenses.

The statute of limitations for medical malpractice actions in the state is three years. Due to
oversight and neglect (rumor has it that both Stephenson and Gordon have substance abuse
problems,) the firm fails to file a complaint against the attending surgeon and Pinecrest General
Hospital within the three-year period.

Even though he lacks legal training, Littleton knows he will be forever barred from bringing a
lawsuit against the doctor and the hospital. Having experienced catastrophic neglect from two

professions he once respected, Littleton focuses his remaining “life energy” on bringing
Stephenson, Gordon, and Ratcliff to justice. He sues the general partnership, as well as individual

attorneys Stephenson, Gordon, and Ratcliff for legal malpractice. Ratcliff’s attorney moves for
dismissal of the claim against his client individually, arguing that Ratcliff was not an “attorney of

record” for Littleton, and as a result, should be dismissed personally from the lawsuit.

Will Ratcliff succeed in his motion for dismissal?

36-*

Partnership (Uniform

Partnership Act Definition):

36-*

• “Association of two or more persons to

carry on as co-owners a business for profit”

Characteristics of Partnership

36-*

■ Voluntary and consensual relationship

■ Between two or more individuals, partnerships, corporations, or
other forms of business organization

■ Engaged in numerous business transactions over period of time

■ Partners share profits and management of business

Situations Where N o Partnership:

36-*

■ Employer shares profits with employee as payment for work

■ Landlord accepts share of profits for payment of rent

■ Party receives share of profits for payment of debt

■ Party receives share of profits for payment of annuity to
widow/representative of deceased partner

■ Party receives share of profits for payment from sale of goodwill of
business/other property

■ Party receives share of profits for payment of interest on a loan

Formation of Partnership

36-*

Partnership agreement (“articles of partnership”)
should include:

■ Name of each partner

■ Name of partnership

■ Duration of partnership

■ How profits divided

■ Division of management responsibilities

■ Contributions from each partner

Partnership Duties

36-*

■ Duty of Loyalty

■ Duty of Obedience

■ Duty of Care

Partnership
Rights

36-*

■ Right to Share in Management

■ Right to Share in Profits

■ Right to Compensation

■ Rights to Partnership Property

■ Right to Inspect Books

■ Right to an Accounting

Circumstances “Triggering” Partner’s Right to
an Accounting

36-*

■ Whenever partnership agreement provides for an accounting

■ Whenever co-partners wrongfully exclude partner from partnership/from
access to partnership books

■ Whenever partner fails to disclose profit/benefit from partnership (breach of
“fiduciary duty”)

■ Whenever circumstances render accounting “just and reasonable”

Interactions Between Partners and Third
Parties

36-*

■ If partnership has liability, each partner has unlimited personal liability (“joint

and several” liability)

■ “Joint and several” liability: Third party can choose to sue partners

separately, or all partners jointly in one action; partners are collectively, as

well as individually, liable for partnership debts

■ All partners jointly and severally liable for commission of tort by any partner

■ Implied liability of partners when purchases made to perpetuate partnership’s

business

The Revised Uniform

Partnership Act (RUPA)

36-*

Revised version of Uniform Partnership Act

(UPA); use of RUPA varies from state to

state

Chapter 37

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Partnerships:

Termination and Limited

Partnerships

Chapter 37 Case Hypothetical

37-*

Morrison, Manzarek and Huxley is a general partnership law firm located in Los Angeles,

California. The partnership was formed in 1967, the year Robbie Morrison, John Manzarek and

Raymond Huxley graduated from the University of California at Los Angeles (UCLA) School of

Law.

Robbie Morrison’s desk had sat empty for the past two (2) weeks. John and Raymond had no idea

where he was. The day before he left, Robbie had told his fellow partners he was tired of the

practice of law, and wanted to do something else with his life. Concerned about their partner,

especially since he had never “disappeared” like this before, John and Raymond drove to Robbie’s

house on Love Street, where he lived with his common-law wife, Pamela Kennealy.

Pamela answered the door. When asked of Robbie’s whereabouts, Pamela responded that she did

not know where he was. She did say that he had said something about going to the desert, and had

left in his 1967 Shelby GT500 Mustang. He had not returned home in the past two (2) weeks, nor

had she seen him since he left.

John and Raymond consider Robbie’s disappearance strange, and given the fact that he had, by

Pamela’s account, chosen to leave, they considered his absence inexcusable. They are

considering partnership dissolution.

Do John Manzarek and Raymond Huxley have the legal right to dissolve the Morrison,

Manzarek and Huxley general partnership?

Chapter 37 Case Hypothetical and Ethical Dilemma

37-*

Harris, Pendleton, and McRae, certified public accountants, have operated their general partnership

accounting firm since the “disco ball and polyester” years of the 1970s. Harris is 68 years old,

Pendleton is 66, and McRae is 65. The have operated their partnership by way of an “old-school”

approach, a “handshake” agreement, since their professional association was first formed (in spite

of strong advice from legal counsel to the contrary.)

Harris has been acting rather strange in recent months. Clients and support staff have been asking

questions. Six weeks ago, Harris was discovered standing on top of his desk singing the 1970s

Rick Dees tune, “Disco Duck,” interspersing quacking sounds throughout his rendition of the

disco classic. Harris no longer wears conservative business attire; instead, he has opted for a light

blue leisure suit with white patent leather shoes. Currently, he can be found again standing on his

desk, this time offering up his version of the 1979 Sister Sledge anthem, “We Are Family.”

Pendleton and McRae are in the conference room, considering their options and the future of their

accounting business. They would like to terminate Harris’ partnership, but they are unsure whether

they have the legal right to do so. They are also struggling with the notion of an ethical obligation

to “try to work things out” with Harris; after all, he has been their partner for over thirty years.

Finally, they wonder whether they could end their professional relationship with Harris, without

being required to dissolve the existing partnership and “wind up” the financial affairs of the

business.

Advise Pendleton and McRae of their legal rights, as well as their ethical responsibilities.

Exhibit 37-1: The Life of a
Partnership

37-*

■ Formation–Partnership formed either by written agreement, articles of

partnership, or by estoppel

■ Performance—Business conducted as partners work for benefit of

partnership, in accordance with partnership agreement

■ Dissolution—Partnership dissolves either by act of court, act of partners, or

operation of law

■ Winding Up—Partners complete unfinished partnership business, collect and

pay debts, collect partnership assets, and take inventory

■ Termination or Continuation—Partnership terminates, or continues by

creation of continuation agreement

Partnership Termination

37-*

■ Begins when partnership dissolves

■ Once partnership dissolved and assets liquidated and

distributed (“winding up”), partnership terminated

Partnership Dissolution

37-*

■ Definition: Partnership cessation

■ Partnership dissolution can result from:

■ Partner actions

■ Operation of law

■ Court action

Events Resulting in Partnership
Dissolution

37-*

■ Fulfillment of established (agreed-upon) partnership objective

■ Expiration of term stated in partnership agreement

■ Partner withdraws from “partnership at will” (partnership that does not
specify objective/duration of partnership)

■ Partner withdraws in accordance with partnership agreement

■ Partner expelled from partnership in accordance with partnership agreement

Examples of Partnership Dissolution By
“Operation of Law”

37-*

■ Partner dies

■ Partner adjudicated bankrupt

■ Partnership engages in illegal activity

Examples of Partnership Dissolution By
“Court Action”

37-*

■ Partner adjudicated insane

■ Impractical to continue partnership business

■ Partner incapable of fulfilling his/her duties established by

partnership agreement

■ Partner disagreement as to how to conduct partnership business

“Winding Up” of Partnership
(Definition):

•Activity of completing unfinished partnership business, collecting and

paying debts, collecting partnership assets, and taking inventory

37-*

Order of Distribution of Partnership Assets
(Upon “Winding Up”)

37-*

■ Payment to partnership creditors

■ Payment of refunds/loans to partners for loans made to

partnership

■ Payment of partners for invested capital

■ Payment of profits distributed to partners per terms of

partnership agreement

Limited Partnership

37-*

■ Definition: Agreement between at least one general
partner and at least one limited partner

■ Allows investor (limited partner) to share in profits of
partnership

■ Limited partner’s liability limited to amount he/she
invests in business

Requirements for Limited Liability (of
Limited Partner)

37-*

■ Limited partner has complied in good faith with certificate of
limited partnership filing requirement

■ Limited partner does not participate in control of business

■ Limited partner’s surname is not part of partnership name

Comparison of General Partners and
Limited Partners

37-*

■ General Partner:

■ Has all rights associated with controlling business

■ Has unlimited personal liability for all partnership debts

■ Acts as agent of partnership

■ Limited Partner:

■ Has no right to participate in management and control of business

■ Liability limited to amount of capital partner has contributed to business

■ Is not an agent of the partnership

Reasons For Dissolution of Limited
Partnership

37-*

■ Expiration of term established in certificate of limited partnership

■ Completion of objective established in certificate of limited
partnership

■ Unanimous written consent of all partners (limited and general)

■ Withdrawal of general partner (unless certificate establishes that
other general partners will continue operation of business)

■ Court action

Limited Liability Company (LLC)

37-*

■ Similar to limited partnership, since each member has limited
liability (dependent on investment he/she makes)

■ Tax advantages similar to partnership (“single taxation”)

■ Created based on agreement between members

■ Each member can participate in management

Chapter 38

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Corporations:

Formation and

Financing

Chapter 38 Case Hypothetical

38-*

Phoebe Main and Franklin Kilbride, best friends, love to cook. The two are so

inseparable that some time ago, those who knew them began to jokingly refer to

Phoebe and Franklin as “Ma and Pa.” One of their kitchen concoctions, kettle corn,

became so popular (Phoebe and Franklin loved to share their caloric creations) that

others have encouraged them go into business and sell their kettle corn as a product.

Phoebe and Franklin agree. They have decided to form a traditional corporation as co-

owners, and they have agreed on a name for their company: Ma and Pa Kettle Corn

Company, Inc.

In the articles of incorporation (the document Phoebe and Franklin will send to the

Kansas Secretary of State’s office for approval of corporate status), the two are required to

indicate the total number of stock shares the company is authorized to issue. “Ma and

Pa” are perplexed. Both have always considered themselves “good with numbers,” but

they cannot decide what number of shares of stock to indicate in the articles of

incorporation.

What is your recommendation to Phoebe Main and Franklin Kilbride?

(Access the video clip at http://video.google.com/videoplay?

docid=7106559846794044495# to see part of the inspiration for this case study!)

Chapter 38 Case Hypothetical and Ethical Dilemma

Clyde Monett has been operating an art restoration business since 1998, specializing in the
refurbishment of portraits and paintings. He operated the enterprise as a sole proprietorship (called
Monett’s Art Restoration Services) until 2006, when he attended a “Business Structures, Licenses

and Permits” workshop at the local community college, at which time the presenting attorney
suggested he convert his business to a corporation, in order to “shield” Monett’s personal property
and real estate from liability for his business’ financial obligations (Monett’s personal net worth is

approximately $150,000.) Through the incorporation process, the only change to the business
name was the addition of the word “Incorporated.” Monett was the only incorporator of the

business. He serves as the president, vice-president and treasurer of the corporation; his sister,
Georgette O’Keeffe, is the secretary. Since the corporation was formed in 2006, Clyde and

Georgette have only convened one “official” corporate meeting; the meeting lasted approximately
one hour, and the two shared family gossip for forty-five minutes of that hour. Monett’s Art
Restoration Services, Incorporated has maintained an average daily balance of $45.22 in the

corporate checking account at Homeland National Bank.

Yesterday, Monett inadvertently purchased the wrong art refurbishment materials (the cleaning
solution was too acidic,) and the oversight resulted in irreparable damage to a painting

conservatively valued at
$75,000. The owner of the painting, Paul Picasso, demands $75,000 in damages from Monett;
Monett apologizes, offers two free coupons for future restoration services, and refuses to pay

the $75,000. The current corporate checking account balance is $52.84.

Is Clyde Monett personally liable for the $75,000 damage claim? Is he ethically obligated to pay
Paul

$75,000?
38-
*

Characteristics of Corporations

38-*

■ Legal entity

■ Rights as person and citizen

■ Creature of state

■ Limited liability of

shareholders

■ Unrestricted transferability of

corporate shares

■ Perpetual existence

■ Centralized management

■ Corporate taxation

Corporate Powers

38-*

■ Corporations have both “express” and “implied” powers

■ Express Powers: Perpetual existence; right to litigate; right to

make contracts; right to borrow/loan money; right to make

charitable donations; ability to establish rules for managing

corporation

■ Implied Powers: Whatever actions necessary (within the law)

to execute express powers

Classifications of Corporations

38-*

■ Public/Private

■ For-Profit/Non-Profit

■ Domestic/Foreign/Alien

■ Publicly Held/Closely Held

■ S-Corporation

■ Professional Corporation

Public Versus Private Corporation

38-*

■ Public Corporation: Corporation created by government to
administer law, with specific government duties to fulfill

■ Example: Federal Deposit Insurance Corporation (FDIC)

■ Private Corporation: Corporation create for private purposes

For-Profit Versus Non-Profit Corporations

38-*

■ For-Profit Corporation: Objective is to operate for profit;
shareholders seeking to make profit purchase stock these
corporations issue

■ Non-Profit Corporation: May earn profits, but they do not
distribute these profits to shareholders (non-profit corporation
does not issue stock, nor does it have shareholders); instead,
corporation reinvests profits in business

Domestic, Foreign, and Alien
Corporations

38-*

■ Domestic Corporation: Doing business within state of

incorporation

■ Foreign Corporation: Doing business in states other than state

of incorporation

■ Alien Corporation: Doing business country other than country

of incorporation

Publicly Held Versus Closely Held
Corporation

38-*

■ Publicly Held Corporation:

■ Stock available to public

■ Closely Held Corporation (a.k.a. “Close”, “Family”,

“Privately Held” Corporation):

■ Generally does not offer stock to public

“Subchapter S” Corporation

38-*

■ Named after provision of Internal Revenue Service

(IRS) code that provides for it

■ Particular type of closely held corporation (no more

than one hundred shareholders)

■ Combines advantages of limited liability and single

taxation

Formation of Corporation

38-*

■ Promoters organize corporate formation

■ Subscribers offer to purchase stock in corporation in

formation process

■ State selected for incorporation

Questions to Consider in Selecting a State For
Incorporation

38-*

■ How much flexibility does the state grant to corporate
management?

■ What rights do state statutes give to shareholders?

■ What restrictions does the state place on the distribution of
dividends?

■ Does the state offer any kind of protection against takeovers?

Legal Process of Incorporation

38-*

■ Selection of corporate name

■ Drafting and filing articles of incorporation

■ First organizational meeting held

Remedies For Defective
Incorporation:

38-*

■ “De jure” corporation: Lawful corporation that has met the substantial

elements of incorporation process

■ “De facto” corporation: Corporation that has not met the requirements of

state incorporation statute, but courts recognize it as a corporation for most

purposes to avoid unfairness to third parties who reasonably believed it was

properly incorporated

■ Corporation by estoppel: Corporation prevented by court from denying its

corporate status

■ Piercing corporate veil: Shareholders personally liable when they have used

corporation to engage in illegal/wrongful acts

Situations When Courts Likely To Pierce
Corporate Veil

38-*

■ Corporation lacked adequate capital when initially formed

■ Corporation did not follow statutory mandates regarding
corporate business

■ Shareholders’ personal interests and corporate interests are
commingled (corporation has no separate identity)

■ Shareholders attempt to commit fraud through corporation

Debt Securities Versus Equity Securities

38-*

■ Debt Securities: Bonds (representing loans to

corporation from another party)

■ Equity Securities: Stock

Types of Debt Securities
(Bonds):

38-*

■ Unsecured Bond: No assets support corporation’s obligation to repay face
value of bond

■ Secured Bond: Specific property supports corporation’s obligation to repay;
creditor can seize secured interest if bond not repaid

■ Income Bond: Corporation pays interest on bond in proportion to earnings

■ Convertible Bond: Allows shareholders to exchange bond for shares of
company stock

■ “Callable” Bond: Allows corporation to call in and repay bond at specific
times

Equity Securities: Preferred Stock Versus
Common Stock

38-*

■ Preferred Stock: Stockholder enjoys preferences

regarding assets and dividends

■ Common Stock: Stockholder owns portion of

corporation, but no preferences regarding assets and

dividends

Chapter 39

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Corporations, Directors,

Officers, and

Shareholders

Chapter 39 Case Hypothetical and Ethical Dilemma

39-*

Zaxxon-Mobile Oil Company, Inc., headquartered in Mobile, Alabama, is a multinational

corporation with 2009 annual profits of $45 billion. Zaxxon-Mobile has twelve (12) board

members who serve the company on a part-time basis, with each board member receiving an

average of $300,000 per year in compensation.

Emily D. Chanel, a pre-law student at The University of Alabama at Mobile, is very familiar with

Zaxxon-Mobile Oil Company, Inc., and she has studied her business law textbook material on

corporations and their directors, officers and shareholders very carefully. She recalls that the board of

directors and its members owe a strict fiduciary duty to the corporation; as part of this fiduciary duty,

the board must exercise oversight in monitoring the actions of corporate employees, including the

executives and officers of the corporation.

Emily ponders, “How can board members of a major corporation be truly objective when they are

being paid such lavish sums of money? Would not board members have a “Don’t rock the boat”

mentality in terms of exercising their oversight function? Why, for example, would a Zaxxon-

Mobile board member question the practices of the company’s high-ranking executives and

officers, when such an inquiry might jeopardize his or her $300,000 per year annual compensation?

‘Make no bones about it,’ if I were a board member at Zaxxon-Mobile, I would probably be a ‘yes-

woman” and approve of everything the chief executive officer, the chief financial officer and the

chief operating officer wanted to do!”

How do you respond to Emily D. Chanel’s questions and overall concerns about board

member compensation and objectivity?

Chapter 39 Case Hypothetical and Ethical Dilemma

39-*

Dr. Charles Finnegan is a newly-appointed member of the Board of Directors of Walnut Grove

Community College (W.G.C.C.) in Walnut Grove, California. The position is unpaid, but does

come with the “perks” of positive exposure and prestige in the local community.

At his first board meeting, the directors are discussing and considering for approval service

contracts between W.G.C.C. and the local business community. The third contract for consideration

is a janitorial service contract, valued at $150,000, between W.G.C.C. and Antiseptic Andy Cleaning

Service, Inc. Finnegan is quite surprised; after all, “Antiseptic Andy” is owned and operated by his

first cousin, Andrew Deere. Cousins Finnegan and Deere have not seen each other in three years,

nor have they otherwise communicated during that period of time.

The chairperson of the Board of Directors calls for a vote on the janitorial service contract.

According to W.G.C.C. regulations, the board must unanimously approve contracts with the

business community.

Finnegan is perplexed. If he votes and says nothing about his kinship to Deere, he still feels he

can “sleep at night,” since he will not receive any financial gain from the contract. If he discloses

his kinship to Deere, he fears that Deere’s business opportunity will be jeopardized.

Does Finnegan have a legal obligation to disclose his relationship to Deere? Would it be a

“conflict of interest” for Finnegan to vote in favor of the contract? Does he have an ethical

obligation to disclose the relationship?

Summary of Roles of Directors, Officers, and

Shareholders

39-*

■ Directors–

■ Officers–

■ Shareholders–

■ Vote on important corporate
decisions

■ Appoint and supervise officers

■ Declare and pay corporate
dividends

■ Manage corporation

■ Run “day-to-day” business of firm

■ Agents of corporation

■ Elect board of directors

■ Approve major board decisions

Summary of Rights of Directors, Officers, and Shareholders

39-*

■ Directors–

■ Officers–

■ Shareholders–

■ Right to Compensation

■ Right to Participation

■ Right to Inspection

■ Right to Indemnification

■ Rights determined in employment
contract

■ Stock certificates

■ Preemptive rights

■ Right to Dividends

■ Right to Transfer Shares

■ Inspection Rights

■ Right to Corporate Dissolution

■ Right to File Derivative Suit

■ Right to File Direct Suit

Fiduciary Duties

39-*

Definition: Duties to corporation that individuals

within corporation have

Primary fiduciary duties include:

■ Duty of Care

■ Duty of Loyalty

■ Duty to Disclose Conflict of Interest

Exhibit 39-2: Liability of Directors and
Officers

39-*

■ Can be held personally liability for their own torts and crimes

■ Can be held personally liable for torts and crimes of other

employees they supervise

■ Can be held liable for wrongful transactions involving company

stock

■ Cannot be held liable for decisions that harm company if they

were acting in good faith at time of decision

Exhibit 39-3: Liability of Shareholders

39-*

■ Shareholders liable (to extent of their investment) for debts of

corporation

■ Shareholders liable for breach of contract if stock subscription

agreement signed and no stock purchased

■ Shareholders liable for watered stock

■ Shareholders personally liable for receiving illegal dividends

Quorum (Definition):

39-*

Minimum number of directors necessary to

validate corporate directors meeting

Proxy (Definition):

39-*

• Provides authorization for third party to

vote in place of shareholder at shareholder’s

meeting

Voting Trust (Definition):

39-*

Agreement between stockholder and trustee in
which stockholder transfers his/her legal share titles
to trustee; trustee is then responsible for voting for

those shares

Business Judgment Rule
(Definition):

39-*

Provides that directors and officers are not
liable for decisions that harmed corporation if

they were acting in good faith at time of
decision

“Watered” Stock

(Definition):

39-*

• Stock issued to individuals at

value below fair market value

Corporations: Directors, Officers, and
Shareholders– Other Relevant
Terminology

39-*

■ Par-Value Shares: Fixed face value noted on stock certificate

■ No-Par Shares: Stock shares without a par value

■ Stock Subscription Agreement: Contractually obliges individual to buy shares
in corporation

■ Pre-emptive Rights: Preferential rights given to existing shareholders to
purchase shares of new stock issue; preference given in proportion to
percentage of stock shareholder already owns

■ Dividend: Distribution of corporate profits/income ordered by directors and
paid to shareholders in proportion to their respective shares in corporation

Corporations: Directors, Officers, and Shareholders–Other
Relevant Terminology (Continued):

individual/another corporation

39-*

■ Right of First Refusal: Given to existing shareholders to purchase any shares
of stock offered for resale by shareholder within specified period of time

■ Inspection Rights: Protect shareholder interest by giving them right to inspect
corporation’s books and records after asking in advance to inspect and having
proper purpose

■ Stock Warrants: Vouchers issued to shareholders, entitling them to given
number of shares at specified price

■ Shareholder’s Derivative Suit: Filed by corporate shareholder when corporate
directors fail to sue in situation where corporation has been harmed by

Chapter 40

Corporations: Mergers,

Consolidations,

Terminations

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 40 Case Hypothetical

40-*

Minisoft Corporation and Pear, Inc. are the two largest computer companies in the

United States. Pending Department of Justice antitrust review, the two corporations plan

to merge, renaming their company “Mini-Pear, Inc.” As an integral part of the merger,

existing shareholders of Minisoft Corporation and Pear, Inc. will be offered an even

“stock swap.” Per the terms of the proposed trade, current shareholders of Minisoft

Corporation and Pear, Inc. will exchange each share of their company’s stock for one (1)

share of Mini-Pear, Inc. stock.

A few shareholders of both Minisoft Corporation and Pear, Inc. do not approve of the

terms of the proposed merger, nor do they approve of the merger itself. The vast

majority of shareholders of companies approve of the merger. What rights do these

shareholders have, either in terms of blocking the merger, or in terms of estimating the

fair value of their existing shares?

Chapter 40 Ethical Dilemma

40-*

As you will learn in reading the chapter material, there are several circumstances that can

“trigger” a state government’s right to involuntarily dissolve a corporation headquartered

in its state, including: 1) the corporation fails to pay taxes within 60 days of the

government-imposed deadline; 2) the corporation fails to submit its annual report to the

secretary of state within 60 days of the report’s due date; 3) the corporation does not have

a registered agent or office in the state for 60 days or more; 4) the corporation fails to

notify the secretary of state within 60 days that its registered agent and/or registered

office has changed; or 5) the corporation’s duration, as specified in its articles of

incorporation, has expired. Arguably, many of the described “triggering events” are

technicalities, and “inquiring minds” might wonder why a state government would

make such a drastic decision to revoke a corporate charter, especially when it would

jeopardize the livelihood of corporate employees, as well as future corporate tax

payments to the state. The absence of those corporate tax dollars could jeopardize

government social programs, which could negatively affect scores of citizens who need

access to those programs.

In light of the potential negative impact on the community, how readily should a state

government use its involuntary corporate dissolution right?

Merger (Definition):

40-*

A legal contract combining two or more
corporations such that only one of the corporations

continues to exist; in essence, one corporation
“absorbs” another corporation

Consolidation (Definition):

40-*

A legal contract combining two or more

corporations, resulting in an entirely new

corporation; in consolidation, neither of the original

corporations continues to exist

Procedures for Mergers and Consolidations

40-*

■ Boards of directors of all involved corporations must approve
the plan

■ Shareholders must approve the plan through a vote at a
shareholder meeting

■ The corporations must submit their plan to the secretary of state

■ The state must review the plan, and if it satisfies legal
requirements, grant an approval certificate

Other Terminology/Rights Regarding Mergers
and Consolidations

40-*

■ Short-form merger (Parent-subsidiary merger): Parent
corporation merges with a subsidiary corporation; does not
require shareholder approval

■ Rights of shareholders: Shareholders vote only on exceptional
matters regarding the corporation

■ Appraisal right: Shareholder’s right to have his/her shares
appraised, and to receive monetary compensation for their value

Purchase of Assets/Purchase of
Stock

40-*

■ Purchase of Assets: One corporation can extend its business operations by

purchasing the assets of another company

■ Corporate Assets (Definition): All intangible items (corporate goodwill, company

name, company logo, etc.) and tangible items (buildings, property, etc.) owned by

the corporation

■ Note: Generally, corporation that purchases assets of another corporation does

not acquire its liabilities

■ Purchase of Stock: An acquiring corporation can take control of another

corporation by purchasing a substantial amount of its voting stock

“Hostile” Takeover

(Definition):

40-*

A takeover to which management of the

target corporation objects

Types of Takeovers

40-*

■ Tender Offer: Aggressor (acquiring corporation) offers target
shareholders a price above current market value of their stock

■ Exchange Offer: Aggressor offers to exchange target
shareholders’ current stock for stock in aggressor’s corporation

■ Cash Tender Offer: Aggressor offers target shareholders cash
for their stock

■ “Beachhead” Acquisition: Aggressor gradually accumulates
target company’s shares

Self-Tender Offer (Definition):

40-*

Response to corporate takeover attempt in which target

corporation offers to buy its shareholders’ stock; if

shareholders accept offer, target corporation maintains

control of business

Leveraged Buyout (Definition):

•Occurs when group within a corporation (usually management)
buys all outstanding corporate stock held by the public; group

gains control over corporate operations by “going private” (i.e.,
becoming a privately-held corporation)

40-*

“Legal Death” of Corporation

40-*

Occurs in two phases:

■ Dissolution: Legal termination of corporation

■ Liquidation: Process by which trustee converts corporation’s
assets into cash, and distributes them among corporation’s
creditors and shareholders

Voluntary Versus Involuntary Dissolution

40-*

■ Voluntary Dissolution: Occurs when directors or

shareholders initiate the dissolution process

■ Involuntary Dissolution: State government forces the

corporation to close

Reasons For Involuntary (State Government-
Initiated) Dissolution of Corporation

40-*

■ Corporation failed to pay taxes within 60 days of due date

■ Corporation failed to submit its annual report to secretary of state with 60
days of due date

■ Corporation did not have a registered agent or office in the state for 60 days
or more

■ Corporation failed to notify secretary of state within 60 days that its registered
agent/registered office had changed

■ Corporation’s duration (as specified in its articles of incorporation) has
expired

Reasons for Court-Ordered Involuntary
Dissolution of Corporation

40-*

■ Corporation obtained its articles of incorporation fraudulently

■ Corporate directors have abused their power (“ultra vires” acts)

■ Corporation is insolvent

Exhibit 40-3: Life of a Corporation

40-*

■ Incorporation—Company becomes incorporated when articles

of incorporation signed

■ Corporation Conducts Business—Directors and officers oversee

business, as shareholders insure company’s stock has value

■ Dissolution—Corporation legally terminated, either voluntarily

or involuntarily

■ Liquidation—Directors convert corporate assets into cash and

distribute them among corporation’s creditors and shareholders

Chapter 42

Employment and Labor

Law

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 42 Case Hypothetical

42-*

Jerry Weir is a loading dock worker for American Beauty Supplies, Inc. Jerry’s

supervisor, Bob Garcia, is suspicious that Jerry is a drug user. Although the company

does not have a dress code for its loading dock employees, Jerry’s attire has given Bob

what he believes to be cause for concern. Today, for example, Jerry is wearing a t-shirt

of his favorite 1960s rock-and-roll band, The Appreciative Deceased. The t-shirt has a

picture of The Appreciative Deceased’s mascot, the “Pooh-Bah Man,” along with the

words “Keep on Tokin’.” He is also wearing a “peace-sign” necklace, tattered blue

jeans, and sandals. Add to his attire Jerry’s long, curly hair and his disheveled beard, and

Bob believes his subordinate is a human tribute to the “60s” generation.

Bob has decided to give Jerry a drug test to determine whether his charge is under the

influence of illicit substances. Bob believes he has “reasonable suspicion” to do so

based on Jerry’s appearance, and the fact that courts have generally upheld the right of

employers to drug-test employees.

Based on these circumstances, does Bob Garcia have the legal right to require that Jerry

Weir submit to a drug test?

Chapter 42 Case Hypothetical and Ethical Dilemma

James Donovan (“J.D.”) Cuthbert, J. D., one year removed from law school and

practicing at the St. Louis firm Gibson, Smith and McGwire, P.L.L.C., is on the “fast-

track” for partnership. Cuthbert was a prized hire for Gibson, Smith, and McGwire; with

an imposing physical presence (6 feet, two inches tall and 210 pounds,) a disarming

smile, and enough ambition for an entire courtroom of first-year attorneys, the

“grapevine” surmises that Cuthbert will be offered a partnership in four years, far sooner

than the standard wait period of seven years.

Summer has arrived, and the Gibson firm has made plans to field its best-ever

recreational softball team. The firm’s “legal nine” competes annually in the Bar

Association of Greater St. Louis Softball League. Attorneys participating in the league

compete just as vigorously on the field as they do in the courtroom, and law firms strive

to earn the annual “bragging rights” associated with a league championship.

A senior partner at Gibson, Smith and McGwire, Tom Hackman, has recruited Cuthbert

to play first base for the team. J.D. was at first reluctant to play (after all, the practice of

law is a “jealous mistress,”) but he eventually agrees, realizing that impressing the

partnership does not occur exclusively in the courtroom.

42-*

The Gibson team excels, powering its way to the bar association softball championship

game against an impressive foe, The Micah A. Mayo Personal Injury Law Firm. In the

bottom of the 9th inning of a tied championship game, with no one on base and two

outs, “The Mighty Cuthbert” comes to bat. He swings for the fence, and drives the

softball to within five feet of a home run. As he reaches third base, Hackman (the

team’s third base coach) signals Cuthbert to stay, but he heads for home instead; glory is

only ninety feet away, an “inside-the-park” homerun would only add to his legend, and

extra innings come with no guarantees.

Playing catcher for the Mayo firm is Albert Flaherty, an imposing figure himself; at 6

feet, five inches tall and 230 pounds, Flaherty is determined to use his height, weight

and mass to save the game for his employer.

Cuthbert and Flaherty collide, a cloud of dust surrounds home plate, and a sickening

“crack” and scream are heard by all in attendance. Cuthbert’s right leg is severely

broken, and he is out. Reasonable minds might differ in terms of which hurts worse.

The Gibson firm loses after 10 innings, and the biggest question back at the office is

“What would have happened if Cuthbert had stayed on third?” Cuthbert is hospitalized;

his medical bills and days out of work are accumulating.

Is Gibson, Smith and McGwire, P.L.L.C. legally liable for Cuthbert’s injury? Is the firm

ethically liable for Cuthbert’s injury?

The Fair Labor Standards Act (FLSA)

42-*

■ Covers all employers engaged in interstate commerce

■ Requires that a “minimum wage” of specified amount
be paid to all covered employees

■ Specified amount periodically raised by Congress

The Family and Medical
Leave Act (FMLA)

42-*

Requires certain employers to establish policy that
provides all eligible employees with up to 12 weeks

of unpaid leave during any 12-month period for
specified family-related occurrences (Examples:

birth/adoption of child, care for seriously ill
spouse/parent/child)

Federal Unemployment Tax

Act (FUTA)

42-*

Created state system that provides

unemployment compensation to qualified

employees who lose their jobs

Workers’ Compensation Laws

42-*

■ State laws that provide financial compensation to employees or
their dependents when covered employee injured/killed on the
job

■ To recover workers’ compensation benefits, injured party must
demonstrate

■ He/she is an employee

■ Both employer and employee are covered by state workers’
compensation program

■ Injury occurred “on the job”

The Consolidated Omnibus Budget
Reconciliation Act (COBRA)

42-*

■ Ensures that when employees lose their jobs or have their hours
reduced to level at which they are not eligible to receive medical,
dental, or optical benefits from their employer, employees have
right to continue receiving benefits under employer’s policy for
up to 18 months by paying the premiums for the policy

■ COBRA does not apply if:

■ Employee fired for “gross misconduct”; or

■ Employer decides to eliminate benefits for all current
employees

The Employee Retirement Income Security
Act

42-*

■ Federal law that sets minimum standards for most voluntarily-established pension and
health plans in private industry to provide protection for individuals enrolled in these
plans

■ Under ERISA, employers must provide pension/health plan participants

■ Plan information (“features and funding”)

■ Assurances of fiduciary responsibility of those in charge of managing and
controlling plan assets

■ Grievance and appeals process for participants to receive benefits from plan

■ Right to sue for benefits and breaches of fiduciary duty

The Occupational Safety and Health Act of
1970 (OSHA)

42-*

■ Requires every employer to “furnish to each of his

employees…employment…free from recognized hazards that are likely to

cause death or serious physical harm”

■ The Occupational Safety and Health Administration is responsible for setting

safety standards under OSHA

■ The Occupational Safety and Health Administration is also responsible for

enforcing the Act through inspections and levying of fines against violators

The “Employment-At-Will” Doctrine

42-*

■ Permits employer to fire employee for any reason or no reason at all

■ Exceptions:

■ Implied Contract

■ Violation of Public Policy

■ Implied Covenant of Good Faith and Fair Dealing

(In states that have adopted any of these three exceptions, employees may be
able to sue for “wrongful discharge”)

Exhibit 42-3: “At-Will” Employment
May an employer fire an at-will employee based
on…

42-*

■ Gender? ■ No

■ Race? ■ No

■ Political Party? ■ Yes

■ No Reason? ■ Yes

Employee Privacy in the
Workplace

42-*

■ Employer privacy policies should cover matters such as employer surveillance policies,
control of access to medical and personnel records, drug testing, and e-mail policies

■ Omnibus Crime Control and Safe Streets Act of 1968

■ Employers cannot listen to private telephone conversations of employees or
disclose the content of those conversations

■ Employers may ban personal calls and monitor calls for compliance, provided that
they discontinue listening to any conversation once they determine it is personal

■ Violators subject to fines of up to $10,000

■ Electronic Communications Privacy Act (ECPA) of 1986

■ Employees’ privacy rights extend to electronic forms of communication, including
e-mail and cellular phones

■ ECPA outlaws intentional interception of electronic communications and the
intentional disclosure/use of information obtained through such interception

Labor Law

42-*

■ Wagner Act of 1935: Enacted to encourage formation of labor unions and provide for

“collective bargaining”

■ Collective bargaining (Definition): Negotiations between employer and group of

employees to determine conditions of employment

■ Taft-Hartley Act of 1947 (Labor Management Relations Act): Designed to limit some

of the powers unions had acquired under Wagner Act

■ Note: Taft-Hartley Act was an amendment to Wagner Act; collectively referred to

as National Labor Relations Act

Labor Law (Continued)

42-*

■ Landrum-Griffin Act of 1959

■ Governs internal operations of labor unions

■ Requires certain financial disclosures by unions

■ Establishes civil and criminal penalties for financial abuses by union
officials

■ “Labor’s Bill of Rights” (contained in Landrum-Griffin Act) designed to
protect employees from their own unions

Labor Law (Continued)

42-*

■ National Labor Relations Board (NLRB)

■ Created by Wagner Act

■ Administrative agency formed to interpret and enforce National Labor Relations Act

■ Primary functions of NLRB include

■ Monitoring conduct of employer and union during an election to determine whether

workers want to be represented by a union

■ Preventing and remedying unfair labor practices by employers/unions

■ Establishing rules to interpret the National Labor Relations Act

“Good Faith” Requirements of National
Labor Relations Act

42-*

Both employer and employee bargaining unit representative must:

■ Meet at reasonable times and confer in good faith

■ Sign a written agreement if one is reached

■ When intent on terminating/modifying existing contract, give sixty days’
notice to other party, with offer to confer over proposals, and give thirty days’
notice to federal/state mediation services in event of pending dispute over
new agreement

■ Neither strike nor engage in lockout during sixty-day notice

Strikes, Pickets, and Boycotts

42-*

■ Strike: Temporary, concerted withdrawal of labor

■ Picket: Designed to inform public (usually through public

demonstration and/or speech) of labor dispute

■ Boycott: Refusal to deal with, purchase goods from, or work for

a business

Chapter 43

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Employment

Discrimination

Chapter 43 Case Hypothetical and Ethical Dilemma

43-
*

Scooters Restaurant is a popular “dive” in Key Largo, Florida with twenty-nine

employees. It primarily attracts male bikers en route to sunny, sub-tropical Key West.

Although the testosterone-charged motorcyclists claim they stop at Scooters for its

delicious buffalo wings and adult beverages, their wives and girlfriends believe the real

reason they patronize the restaurant is the wait staff. Scooters only hires “drop-dead”

gorgeous female waitresses ranging in age from eighteen to twenty-eight, with

uniforms of white, midriff-baring halter tops and key lime-green “short” shorts. Male

waiters need not apply at Scooters.

Five (5) male plaintiffs who were denied wait-staff employment at Scooters have filed a

civil lawsuit against the restaurant, alleging gender discrimination in violation of Title

VII of the Civil Rights Act of 1964. The plaintiffs uniformly claim that although they

were offered significantly lower-paying cook and dishwasher positions at Scooters, they

were denied wait- staff positions on the basis of their gender. The eatery has defended

on the basis of the “bona fide occupational qualification” (“BFOQ”) defense. The

restaurant alleges that its female- only wait staff hiring practice is reasonably necessary

for the success of its business, based on the contention that its typical customer (a burly,

bearded man in bike leather) expects to be served only by an attractive waitress.

Is Scooters Restaurant liable for gender discrimination, or should the court accept

the defendant’s “BFOQ” defense?

Chapter 43 Case Hypothetical

Ben Kerrigan and Allison LaCroix have worked together for five years. Although he has

kept it to himself, Ben adores Allison, hanging on every word she says and watching

every move she makes. Ben feels considerable guilt for his amorous emotions, since he

has been married to his wife Jeannie for seven years, and since Allison is also married.

From Allison’s perspective, her association with Ben is purely professional, although

she does consider him a dear friend, enjoying his sense of humor, sharing with him

many of her daily experiences, and consoling in him when life is unkind.

On Friday morning, Ben asks Allison to join him for a quick lunch, stating “You drive,

and I’ll buy.” They choose a local delicatessen, and are seated at a “table for two.”

Aware that life is short, and weakened by five years of keeping a torturous secret, Ben

confesses all to Allison over turkey subs and tomato soup. Ben proclaims, “Allison, I am

tired of living a lie. You are not just the woman of my dreams, you are real, and I want

you for my own. I worship you, and I want to share my life with you. You are the most

beautiful and intelligent woman I have ever met, and I am willing to leave Jeannie for

you. I hate to hurt your husband, but I love you more than he does. As far as work goes,

we can try our best to keep it a secret; if not, I am willing to find another job. Tell me

how you feel, Allison.”

43-*

At first, Allison is speechless; her face then reddens, and she finds the words:

“Ben, I thought you were my friend, but instead, you are a lustful stalker. I feel

violated. For crying out loud, Ben, we are both married. Don’t you understand the

true meaning of “family values?” Allison immediately rushes from the restaurant,

leaving Ben to find a cab, and Ben wonders if he has said too much.

The following Monday, Ben is called into the office of his supervisor, Alex

Friedman. Friedman informs Ben that much to his regret, Allison has filed a

sexual harassment claim against him, and that although she would like to resolve

the matter internally, she will file a claim with the Equal Employment

Opportunity Commission if the incident is not addressed satisfactorily. Friedman

has scheduled an internal hearing in two weeks. The supervisor states that if

Allison’s claim holds, Ben will be terminated in light of the company’s “zero-

tolerance” anti-sexual harassment policy.

Do Ben’s statements constitute sexual harassment?

“Employment-At-Will”

43-*

■ Means that any employee not employed under a
contract/collective bargaining agreement may quit for any
reason/no reason at all, with no required notice to employer

■ Also means employer may fire employee at any time, with no
notice, for almost any reason

Federal Employment Laws

43-*

■ Provide minimum level of protection for employees

■ States may give employees more rights, but not less

rights, than they have under federal law (federal

supremacy)

Title VII of the Civil Rights Act (1964, As
Amended by the Civil Rights Act of
1991)

43-*

Protects employees against discrimination based on:

■ Race

■ Color

■ Religion

■ National Origin

■ Gender

“Disparate Treatment” Versus “Disparate
Impact” Discrimination

43-*

■ “Disparate Treatment” Discrimination: In all aspects of human resource

management (hiring, firing, promotions, etc.), if candidate/employee

discriminated against based on membership in a protected class, employee has

actionable claim based on intentional discrimination

■ “Disparate Impact” Discrimination (also referred to as unintentional

discrimination): Occurs when plaintiff establishes that while employer’s

policy/practice appears to apply to everyone equally, its actual effect is to

disproportionately limit employment opportunities for a protected class

Requirements For Establishing A
“Disparate Treatment”
Discrimination Case

43-*

■ Plaintiff-employee must demonstrate a “prima facie” case of
discrimination

■ Defendant-employer must articulate a legitimate, non-
discriminatory business reason for the action

■ Plaintiff-employee must demonstrate that the reason given by the
defendant-employer is a “mere pretext”

Disparate Treatment and Disparate Impact: Burden-Shifting

43-*

■ Disparate Treatment (Intentional Discrimination)

■ Burden on Employee-Plaintiff: Demonstrate prima facie case of

discrimination

■ Burden on Employer-Defendant: Articulate legitimate, non-

discriminatory business reason for action

■ Burden on Employee-Plaintiff: Show reason given by employer is “mere

pretext”

■ Disparate Impact (Unintentional Discrimination)

■ Burden on Employee-Plaintiff: Establish statistically that rule restricts

employment for those in protected class

■ Burden on Employer-Defendant: Articulate why policy or practice is

“business necessity”

■ Burden on Employee-Plaintiff: Show that alleged “business necessity” is

“mere pretext”

Sexual Harassment

43-*

■ Includes unwelcome sexual advances, requests for sexual favors, and other
verbal/physical conduct of a sexual nature that implicitly/explicitly makes
submission a term/condition of employment;

■ Makes employment decisions related to individual dependent on submission
to such conduct (“quid pro quo” sexual harassment); or

■ Has the purpose/effect of creating an intimidating, hostile/offensive work
environment (“hostile work environment” sexual harassment)

Pregnancy Discrimination Act

of 1987

43-*

Amended Title VII of the Civil Rights Act by
expanding definition of sex discrimination to include

discrimination based on pregnancy

Defenses to Claims Under Title VII of The Civil Rights Act

43-*

■ Bona Fide Occupational Qualification (BFOQ): Allows employer to discriminate in

hiring on basis of gender, religion, or national origin (but not race/color) when doing

so is “reasonably necessary” for performance of job

■ Merit

■ Seniority: Seniority system legitimate if:

■ System applies equally to all persons

■ Seniority units follow industry practices

■ Seniority system did not have its genesis in discrimination; and

■ System maintained free of any illegal discriminatory purpose

Exhibit 43-3: Bona Fide Occupational
Qualification

May a BFOQ be based on…

43-*

■ Race? ■ No

■ Gender? ■ Yes

■ Religion? ■ Yes

■ Color? ■ No

■ National Origin? ■ Yes

■ Customer Preference? ■ No

(Exception: Sexual Privacy)

Procedure For Filing A Claim Under Title VII of
the Civil Rights Act

43-*

■ Charge Filed With EEOC

■ EEOC Conciliation Attempts

■ EEOC “Right-to-Sue” Letter

Age Discrimination in
Employment Act of 1967 (ADEA)

43-*

Prohibits employers from refusing to hire,
discharging, or discriminating in “terms and

conditions” of employment on basis of
employee/applicant being age 40 or older

Proving A “Prima Facie” Case of Age Discrimination Involving
Termination of Employment

43-*

Plaintiff must establish facts sufficient to create reasonable inference that age

was a determining factor in termination; Plaintiff raises inference by

demonstrating that he/she:

■ Belongs to statutorily protected class (those individuals 40 years old or older)

■ Was qualified for the position

■ Was terminated under circumstances giving rise to an inference of

discrimination

Americans With Disabilities Act

(ADA)

43-*

• Prohibits discrimination against

employees and job applicants with

disabilities

Who Is Protected Under ADA?

43-*

A disabled individual is defined for purposes of ADA as person who meets
one of the following criteria:

■ Has a physical/mental impairment that substantially interferes with one or
more major life activities

■ Has a record of such impairment

■ Is regarded as having such an impairment

Requirements For Bringing A Successful
Claim Under ADA

43-*

Plaintiff must show he/she meets all of the following:

■ Has a disability

■ Was “otherwise qualified” for the job

■ Was excluded from the job because of disability

Equal Pay Act of 1963

43-*

Prohibits an employer from paying workers of one
gender less than wages paid to employees of

opposite gender for work that requires equal skill,
effort, and responsibility

Defenses To An Equal Pay Act
Lawsuit

43-*

■ Bona fide seniority system

■ Bona fide merit system

■ Pay system based on “quality or quantity” of production

■ Any other factor(s) other than gender

Employment Discrimination

Internationally

43-*

Civil Rights Act of 1991 extended protections of Title
VII and ADA to U.S. citizens working abroad for U.S.

employers; these laws also apply to foreign corporations
controlled by a U.S. employer

Chapter 48

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

The Nature of Property,

Personal Property, and

Bailments

Chapter 48 Case Hypothetical

The American Pistol Association (APA), a gun-rights activist organization, is headquartered in Laramie,

Wyoming. The APA held a ceremonial luncheon at its headquarters, and invited a host of Second

Amendment advocates, including the former governor of Wyoming, Sara M. Caine. Dubbed “The

Renegade” by her avid supporters, most believed that Sara would make a presidential run in the next

election. Known more for her public proclamations than her actual governing acumen, Sara is most-

remembered for leading a gun-rights demonstration in Wyoming’s state capital, Cheyenne, at which

time she held her Chesterfield rifle above her head and announced that before government officials

took her gun away, they would first have to deal with her “sharp, red fingernails!”

As a key part of the ceremony, the APA honored Sara M. Caine’s efforts to uphold the Second

Amendment. The APA’s president, Charles T. Hess, presented Sara with a “Bronco 55” pistol, proudly

manufactured in the United States of America. Sara enthusiastically accepted the Bronco 55. After the

ceremony, Charles approached Sara and informed her that although his organization had planned to get

the gun engraved with her initials on each side of its ivory handle before the presentation, the person

they had chosen to do the work, Edward “Wild Eddie” Cody, had been away on vacation. He further

told Sara that if she would hand the gun to him, he would get Wild Eddie to engrave the gun when he

returned from vacation, and return it to her as soon as possible. Sara happily agreed, and transferred the

gun to Charles.

Charles put the gun in his office desk at APA headquarters. That night, an unknown perpetrator

burglarized APA headquarters, taking only the Bronco 55. Charles suspected the thief was Jean Gigot, a

vocal, well-known opponent of gun rights who had moved from Dijon, France to Laramie several

months ago. During his presentation of the Bronco 55 to Sara, Charles had observed Jean lurking in the

back of the dining room, furtively and feverishly pacing back and forth.

From a legal standpoint, must The American Pistol Association or Charles T. Hess answer to Sara

M. Caine for the theft of the gun?

48-*

Chapter 48 Case Hypothetical

Jason Binghamton is a huge fan of the Montana State Teacher’s College (M.S.T.C.) men’s

basketball team, nicknamed the “Flying Elk.” The M.S.T.C. team has enjoyed the best season in

its 52-year history, and they are a favorite to win the Lewis and Clark League (L.C.L.) men’s

basketball title. In fact, the team has advanced to the L.C.L. men’s basketball tournament

championship, a contest against the Billings Technical College “Fighting Prairie Dogs.”

Jason drives to the championship game at Lewis and Clark Stadium in Helena, Montana. He

approaches the stadium parking lot, and pays the attendant $25 for parking; in return, the attendant

hands Jason a parking stub. On the back of the stub is the following language: “Lewis and Clark

Stadium and the city of Helena shall not be held liable in any way for loss of or damage to visitor’s

property, including loss of or damage to automobiles parked in the stadium parking lot. In

accepting this parking privilege, the patron agrees that he will hold harmless Lewis and Clark

Stadium, and the city of Helena, for such damage.” Jason does not read the language on the

parking stub; instead, he places the ticket on his dashboard, parks his car in area B1 of the lot, locks

the car doors and puts his keys in his pocket, and heads to the stadium.

By all accounts, the game is the proudest moment in the history of the Flying Elk. They defeat the

Fighting Prairie Dogs 82 to 58, and Binghamton leaves the stadium ecstatic, knowing he attends a

college of “winners.”

Upon returning to his car, Jason’ happiness deflates to consternation and anger. His windshield has

been shattered by a stuffed and mounted prairie dog that now lays upside-down in his driver’s seat,

along with countless shards of broken glass. It is obvious to Jason that the “deed was done” by

some disgruntled Fighting Prairie Dog fan, but that individual is probably well on his way back to

Billings by now, and he will never be able to locate the criminal.

Jason files suit against Lewis and Clark Stadium and the city of Helena, Montana, seeking to

hold the defendants “jointly and severally” liable for the damage to his automobile. Will he

win the lawsuit?

48-

*

Categories of Property

48-*

■ Real Property: Land and anything permanently
attached to it (fixtures)

■ Personal Property: Property not attached to land, or
movable property

Transfer of Personal Property

48-*

■ Voluntary Transfer:

■ Sale and Purchase: Acquiring party gives consideration (value) to seller in
exchange for title to property

■ Gift: No consideration given to transferor (donor) by transferee (donee)

■ Involuntary Transfer:

■ Abandoned Property: Property that original owner has discarded

■ Lost Property: Property that true owner has unknowingly/accidentally
dropped/left somewhere

■ Mislaid Property: Property owner has intentionally placed property
somewhere, but has forgotten its location

Elements Necessary For A Valid Gift

48-*

■ Delivery of property (from donor to donee)

■ “Actual” delivery: Physical presentation of gift

■ “Constructive” delivery: Delivery of item that gives access to

gift/represents it (Example: Car keys)

■ Donative intent (of donor to make an immediate gift)

■ Acceptance of property (by donee)

“Inter Vivos” Gift Versus Gift “Causa Mortis”

48-*

■ “Inter Vivos” Gift: “Between the living”; gift made by donor

during his/her lifetime

■ Gift “Causa Mortis”: Gift made in contemplation of donor’s

“imminent and impending” (immediate) death

■ For gift “causa mortis” to be effective, elements of delivery,

donative intent and acceptance must occur before donor’s

death

Bailment (Definition):

48-*

Special relationship in which one party (bailor)
transfers possession of personalty to another party

(bailee), to be used by bailee in an agreed-upon
manner and for an agree-upon time period

Bailor Has Right To Expect Bailee To:

48-*

■ Take reasonable care of bailed property

■ Use bailed property only as stipulated in the bailment agreement

■ Not alter the bailed property in any unauthorized manner; and

■ Return bailed property in good condition at end of bailment

Duties of Bailor

48-*

■ Bailor must provide bailee with any agreed-upon

compensation for bailment

■ Bailor must reimburse bailee for any necessary

costs incurred by bailee during bailment

Documents of Title

48-*

■ Bill of Lading: Document issued by party engaged in

business of transporting goods that verifies receipt of

goods for shipment

■ Warehouse Receipt: Receipt issued by party who is

engaged in business of storing goods for compensation

Special Bailments

48-*

■ Common Carriers (licensed to provide transportation

services to public)

■ Innkeepers (regularly in business of making lodging

available to public)

Chapter 49

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Real Property

Chapter 49 Case Hypothetical and Ethical Dilemma

49-

*

John “Jack” Franklin and Ruby Huss are next-door neighbors. Jack’s narrow road from the

state-maintained highway to his house is approximately two-tenths of one (1) mile long,

and runs along the edge of his property. On the left side of Jack’s road is a drainage ditch

running the length of his road, while on the right side is the property line dividing the

two neighbors’ landholdings. One day, Ruby was out gardening (she loved to cultivate

roses) and Jack approached her with the following question “Ruby, I am going to have

my road graveled, and I would like lay enough gravel to expand my road about four feet

in width. I can’t expand it on the left side because of the drainage ditch, so I was

wondering if you would mind if I widened the road on the right side. It sure would

mean a lot to me, since my road is so narrow right now that I have a hard time driving

my truck up to the house.” This meant that the gravel would extend approximately four

feet onto Ruby’s property.

Ruby believed in the power and value of friendly neighborly relations. She responded,

“Yes Jack, you may certainly do that. That gravel won’t do me or my property any harm.

Tell Ann and the kids (Jack’s wife and children) I said hello when you get back to the

house.”

Based on the facts presented, is Ruby’s four-foot-wide strip of land subject to Jack’s

adverse possession of it? If the gravel remains on this strip of land for the statutorily-

prescribed period of time for adverse possession (twenty years in many states), will Jack

become its owner?

Chapter 49 Case Hypothetical and Ethical Dilemma

Timothy Ackers is a “stay-at-home dad” living in Falling Waters subdivision in

Olympia, Washington. Timothy’s wife Julia earns a six-figure income at the largest

accounting firm in Olympia, and both husband and wife feel fortunate that one of

them is able to stay at home with their two young children, four-year-old Hope and

two-year-old Matthew.

Timothy is part of the community watch organization in his subdivision, and as a

stay-at-home parent, he has ample opportunity to observe the daily neighborhood

“goings-on.” For the past six months, Timothy has noticed heightened activity at

the house down the street owed by the Penningtons (Clara and Jonathan;)

approximately eight to twelve cars come and go from the Pennington driveway

every day, and four months ago, handicapped access ramps were installed at the

front and back entrances to the home. On several occasions, Timothy has seen

elderly people sitting in wheelchairs in the Penningtons’ front yard.

49-

*

Curious, Timothy knocks on the front door of the Pennington home one

Monday morning. Clara Pennington answers. Ackers states “Good

morning, Clara. I know the old saying that ‘curiosity killed the cat,’ but I

can’t help myself. What’s going on at your house? Why are all the elderly

people here? I though both of your parents were deceased, and I thought

Jonathan’s parents had ‘passed on’ as well. Are these people related to you?”

Clara responds: “Timothy, Jonathan and I decided six months ago to open up

an elderly care facility. We didn’t have the money to purchase a separate

building, so we decided to care for the elderly in our home. This gives me a

wonderful opportunity to stay at home, and I wouldn’t be able to do that just

on Jonathan’s income. Plus, think of the advantages for our clients. Isn’t this

so much better than a regular rest home? These folks have cried tears of joy,

and they thank me every day for providing them the quality of care they had

hoped for in their ‘golden years.’”

Falling Waters subdivision is zoned exclusively residential. Should Timothy

report the Penningtons’ zoning violation? What ethical issues are involved in

Timothy’s decision?

Real Property (Definition):

49-*

Land, including anything permanently

affixed to the land

“Fixture” (Definition):

•Any item that was originally a piece of personal property, but became part

of realty after it became permanently attached to real property

Exceptions To “Fixture” Status:

49-*

■ Written agreement between parties that specific items will
continue to be treated as personal property

■ Personal property attached to realty for use of a business renting
property (in a commercial lease arrangement)

■ Such property is known as a “trade fixture”

■ Example: Barber chairs in a barber shop

Interests In Real Property

49-*

■ Fee Simple Absolute: Right to possess for life and devise (will)
to heirs upon death; the most complete interest in real property

■ Conditional Estate: Interest comparable to fee simple absolute,
except that interest will terminate on occurrence/non-
occurrence of a specified condition

■ Life Estate: Granted for lifetime of an individual; right to
possess property terminates upon life estate holder’s death, and
property will pass to another party designated by original grantor

Interests In Real Property (Continued)

49-*

■ Future Interest: Person’s right to property ownership and
possession in the future

■ Leasehold Estate: Right to possess property for a stipulated
period of time

■ Easement: Irrevocable right to use a portion of another’s land
for a specified purpose

Nonpossessory Estates

49-*

■ Easement: Irrevocable right to use some part of another’s land for a specific
purpose without taking anything from the land

■ Example: Utility easement

■ Profit: Right to enter another’s land and take part of the land, or take away a
product of it

■ Example: Right to harvest timber

■ License: Temporary, revocable right to use another’s property

■ Example: Theatre ticket

Co-Ownership Of Real Property

49-*

■ Tenancy In Common: Equal/unequal shares may be held, creditors can
attach any owner’s interest, and deceased owner’s share is transferred to heirs

■ Joint Tenancy: Equal share, creditors can attach any owner’s interest, and
deceased owner’s share reapportioned equally among surviving joint tenants

■ Tenancy By The Entirety: Available to married couples only; shares are equal,
one owner’s creditors cannot attach property, and deceased owner’s share
passes to surviving spouse

Co-Ownership Of Real Property (Continued)

49-*

■ Condominium Ownership: Owner acquires title to a

“unit” within a building, with undivided interest in the

land, buildings, and improvements of the common

areas of the development

■ Cooperative Ownership: Investor resident acquires

stock in the corporation owning the facility and receives

a permanent lease on one unit of the facility

Voluntary Transfer of Real Property

49-*

Requires:

■ Execution—preparation and signing of deed;

■ Delivery—of deed to grantee, with intent of transferring
ownership to grantee;

■ Acceptance—grantee’s expression of intent to possess and own
property

■ Recording—filing deed with appropriate county office to protect
interests of grantee

Deed Requirements

49-*

■ Identification of grantor

■ Expression of grantor’s intent to convey the property

■ Legally sufficient description of the property (including its
physical boundaries and any easements)

■ Any warranties/promises made by grantor with the conveyance

General Warranty Deed

49-*

Contains the following promises/representations:

■ Grantor owns interest he/she is conveying

■ Grantor has right to convey the property

■ No mortgages/liens against property that are not stated in deed

■ Grantee will not be “disturbed” by anyone who has better claim to property
title, with promise to defend grantee’s title against such claims, or to
reimburse grantee for any money spent in defense and/or settlement of such
claims

■ Grantor will provide grantee with any additional documents that grantee
needs to perfect his/her title to property

Other Types of Deeds:

49-*

■ Special Warranty Deed: No representation of guarantees

contained in “general warranty” deed; grantor is merely

promising that he/she has not done anything to lessen value of

property transferred

■ Quitclaim Deed: No warranties; grantor simply conveys

whatever interest he/she holds

Types of Involuntary Transfers:

49-*

■ Adverse Possession: When person openly treats real property as
his/her own, without protest/permission from real owner, for
statutorily-established period of time, ownership is automatically
vested in that person

■ Condemnation: Government acquires ownership of private
property for “public use” for “just compensation” over the
protest of the property owner

Restrictions On Land Use

49-*

■ Restrictive Covenants: Promises to use/not to use land

in particular ways

■ Zoning: Restriction of use of property to allow for the

orderly growth and development of community and to

protect “health, safety, and welfare” of its citizens

Chapter 50

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Landlord-Tenant Law

Chapter 50 Case Hypothetical and Ethical Dilemma

50-*

Al Jennings is an undergraduate student at Central Montana Technical University

(CMTU). During the academic year, Al lives in off-campus housing at Elk Meadows

Apartments. After finishing his junior year in the spring, Al planned to go home to

Billings, Montana for the summer. Since his friend, Corey Hammonds, was enrolled in

summer school at CMTU and needed a place to live, Al allowed him to move into his

apartment. Before he left for Billings, Al instructed Corey to pay Elk Meadows’ on-site

property manager, Ashley Hunter, rent in the amount of

$575 by the first day of each month in June, July, and August. Corey assured Al he

would do so, and told his friend he was happy to find such a nice place to live for the

summer at such an affordable price. Al informed Corey he would return to CMTU and

Elk Meadows for the fall semester on August 22.

When Al returned to his apartment in August, he was surprised to find it unoccupied.

Within an hour, there was a knock at his door. It was Ashley Hunter. Ashley wanted to

know why Al had not paid rent for the past three (3) months. Al immediately dialed

Corey’s cell phone number and Corey answered, explaining that he had withdrawn from

summer school in May, choosing instead to hitchhike around the west. Al was

dismayed.

Is Al Jennings liable to Elk Meadows Apartments for the three months’ rent?

Chapter 50 Case Hypothetical

50-*

While the rest of the country debates whether global warming is real, or whether mankind

is responsible for it, all Trent Withers knows is that he is hot. Extremely hot. The

temperature is 99 degrees in Lucasville, and the air conditioner in Trent’s apartment at

Shady Valley Estates has been inoperable for the past two weeks. The apartment

building owner lives one hundred miles away in Kensington, and although there is an

apartment manager supposedly living on site, he can never find him. The sign on the

apartment manager’s door always says “Will return at 12: 00 noon,” but even in the

afternoon and evenings, the manager will either not answer his door, or he is not there.

Trent is debating his options. He cannot afford a wall-unit air conditioner; even if he

could, he wonders whether installing such a unit would violate the terms of his lease.

Trent signed a twelve-month lease, obligating him to pay a rent amount of

$795 per month. There are ten months remaining on the lease. He has a friend who

lives in neighboring Floral Valley who has offered Trent a room in his house for $300

per month.

Does Trent have the legal right to “pack his bags” and leave? If he does, will he be

responsible for any remaining amount due on the lease term at Shady Valley Estates?

Landlord-Tenant Law: Terminology

50-*

■ Landlord (Lessor): Property owner

■ Tenant (Lessee): Party who assumes temporary

possession of property

■ Leasehold Estate: Property subject to the lease

■ Lease: Contract between landlord and tenant

Types Of Leases

50-*

■ Definite Term: Automatically expires at end of
designated term

■ Periodic Tenancy: Created for a recurring term

■ Tenancy At Will: Termination may occur at any time

■ Tenancy At Sufferance: Tenant fails to leave property
after termination of lease

Fair Housing Act

50-*

Prohibits landlords from discriminating on

basis of race, color, sex, religion, national

origin, or familial status

Rights and Duties of Landlord and Tenant:
Terminology and Rules of Law

50-*

■ Covenant of Quiet Enjoyment: Promise that tenant has right to quietly enjoy the land

■ Actual Eviction: Landlord physically prevents tenant from entering premises; can be
full (prohibited from all parts) or partial (prohibited from some parts)

■ Constructive Eviction: Premises become unsuitable for use due to landlord

■ Implied Warranty of Habitability: Requirement that premises be fit for “ordinary”
residential purposes

■ Waste: Tenant conduct that causes permanent and substantial injury to landlord’s
property

■ Alterations: Changes that affect condition of premises; generally cannot be made
without landlord’s consent

Examples of Duties and Corresponding
Rights of Landlord and Tenant

50-*

■ Landlord duty to put tenant
in possession

■ Landlord duty of covenant of
quiet enjoyment

■ Tenant duty not to commit
waste

Duty Corresponding Right

■ Tenant’s right to retain
possession

■ Tenant’s right to quiet
enjoyment of the property

■ Landlord’s right to
reimbursement for tenant’s
waste

Rights and Duties of Landlord and
Tenant: Terminology and Rules of Law
(Continued)

50-*

■ Common Areas: Areas used by all tenants for which landlord is
responsible

■ Options when landlord fails to repair leased property:

■ Terminate lease

■ Withhold rent

■ Repair and deduct costs of repair

■ Sue landlord

Rights and Duties of Landlord and Tenant:
Terminology and Rules of Law (Continued)

50-*

■ Rent: Compensation paid to landlord for tenant’s exclusive use
of and right to possess premises

■ Rent Escalation Clause: Clause included in lease that allows
landlord to increase rent for increases in cost of living, property
taxes, or tenant’s commercial business

■ Landlord’s Lien: Landlord’s right to some/all of tenant’s
property when rent unpaid

Liability For Injuries on the
Premises

50-*

■ Landlord Liability: Landlord can be held liable for injuries sustained in
common areas, and for injuries that occur outside common areas due to lack
of repairs landlord should have made

■ Landlord has responsibility to ensure that premises are in reasonably fit
condition before tenant takes control

■ Foreseeability of crime is a factor in liability

■ Tenant’s Liability: Tenant must keep premises in a “reasonably safe”
condition, but is responsible only for those areas where customer or visitor
reasonably expected to go

Transferring Interests of Leased Property

50-*

■ Landlord Transfer of Interest: Landlord may transfer property;
new owner becomes landlord until tenant’s lease expires

■ Tenant Transfer of Interest:

■ Assignment: Transfer of tenant’s entire interest in leased
property

■ Sublease: Transfer of less than all of tenant’s interest in
leased property

Termination of Lease

50-*

■ Breach of Condition By Landlord: Landlord interferes with
tenant’s use and enjoyment of premises

■ Forfeiture: Tenant/landlord fails to perform conditions
specified in lease

■ Destruction of Premises: Fire/other disaster destroys premises

■ Surrender: Mutual agreement between landlord and tenant

■ Abandonment: Tenant moves out of leased premises before end
of term

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