Case study law-101: legal environment of business

We're the ideal place for homework help. If you are looking for affordable, custom-written, high-quality and non-plagiarized papers, your student life just became easier with us. Click either of the buttons below to place your order.

Order a Similar Paper Order a Different Paper


  1. Case Study
    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.
    What will be the result?
    How could this dispute have been avoided in the first place?
    Action Items

    1. Read the case study above.
    2. By the due date, submit your answers to the case study questions. Justify your answers.

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

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

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

■ 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

■ 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


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

■ Consumers
■ Owners or Investors
■ Management
■ Employees
■ Community
■ Future Generations


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

■ Freedom
■ Security
■ Justice
■ Efficiency


Primary Values and Business Ethics:

■ To act without restriction from rules imposed by

■ To possess the capacity or resources to act as
one wishes

■ To escape the cares and demands of this world


Primary Values and Business Ethics:

■ 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


Primary Values and Business Ethics:

■ 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:

■ 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)

■ Public Disclosure
■ Universalization
■ Golden Rule


Chapter 03
The U.S. Legal System

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

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.

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 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.”

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

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

■ Original Jurisdiction:
The power to hear and
decide cases when they
first enter the legal

■ Appellate Jurisdiction:
The power to review
previous judicial
decisions to determine
whether trial courts erred
in their decisions


Types of Jurisdiction

■ 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


Subject-Matter Jurisdiction:
Exclusive Federal Jurisdiction

■ 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

■ Federal question cases
■ Diversity of citizenship cases


Subject-Matter Jurisdiction: State

■ All cases not falling under Exclusive Federal


The Federal Court System

■ The United States Supreme Court
■ Intermediate Courts of Appeal
■ Federal Trial Courts (U.S. District Courts)


State Court Systems

■ State Supreme Courts
■ Intermediate Courts of Appeal
■ State Trial Courts


Threshold Requirements for

■ Standing (to sue)
■ Case or Controversy (Justiciable Controversy)
■ Ripeness


Steps in Civil Litigation:
The Pretrial Stage

■ Informal Negotiations
■ Pleadings
■ Service of Process
■ Defendant’s Response
■ Pretrial Motions
■ Discovery
■ Pretrial Conference


Steps in Civil Litigation:
The Trial

■ Jury Selection
■ Opening Statements
■ Examination of Witnesses and Presentation of

■ Closing Arguments
■ Jury Instructions


Steps in Civil Litigation:
Post-Trial Motions

■ Motion For Judgment In Accordance With

■ Motion For Judgment Notwithstanding Verdict
■ Motion For New Trial


Steps in Civil
Appellate Procedure


Appellate Court Decision-Making

■ Affirmation
■ Modification
■ Reversal
■ Remand


Chapter 13
Introduction to


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

Chapter 13 Case Hypothetical

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?


Chapter 13 Case Hypothetical

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


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


Contract (Definition):

A legally enforceable agreement


Elements Required For Contract Formation

■ 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

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

■ Lack of proper form requirements (statute of frauds
writing requirement)


The Objective Theory of Contracts

■ 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

■ State common law

■ The Uniform Commercial Code (Article 2)

■ Governs contracts for the sale of goods


Classification of Contracts:
Bilateral or Unilateral

■ “Bilateral” Contract: Exchange of promises

■ “Unilateral” Contract: Promise in return for
performance of act


Classification of Contracts:
Express or Implied

■ “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

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

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

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


Classification of Contracts:
Executed or Executory

■ “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

■ “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”


Interpretation of Contracts
■ 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

■ 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

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

Chapter 14 Case Hypothetical

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?


Chapter 14 Case Hypothetical

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

■ Manifestation of offeror’s intent to be bound

■ Intent determined by objective, “reasonable person” standard

■ Preliminary negotiations and advertisements do not constitute

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

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


■ 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

■ 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



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

■ 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

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.

Chapter 15 Case Hypothetical

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

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?



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

of a mutually bargained-for exchange


Examples of Consideration

■ Benefit to promisor

■ Detriment to promisee

■ Promise to do something

■ Promise to refrain from doing something


Rules of Consideration

■ 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


■ 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

■ “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

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


Partial Payment of Debt

■ 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
Capacity and Legality

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

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?


Chapter 16 Case Hypothetical and Ethical Dilemma

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

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


Contractual Capacity

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

to understand how to comply with terms of


Contractual Capacity

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


Individuals Who Have Only Limited Capacity
to Contract

■ 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”

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

■ 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

■ 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 No Capacity to Contract

■ Those adjudicated insane

■ Those adjudicated habitually intoxicated

■ Those with appointed legal guardians


Rules Regarding Intoxication

■ General Rule: Contracts made by intoxicated persons are

■ 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


Illegal Contracts

■ 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
Legal Assent

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

Chapter 17 Case Hypothetical and Ethical Dilemma

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


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

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

■ 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



■ 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

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

■ 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,

■ False assertion
■ Intent to deceive, or negligence
■ Justifiable reliance on false assertion by innocent party


Undue Influence

■ 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

■ 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

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



■ 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

■ 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)



■ 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
Agency Formation and


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

Chapter 33 Case Hypothetical

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


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?!”

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

■ 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


Creation of Agency Relationship

■ 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”

■ Individual must misrepresent himself/herself as agent for
another party

■ Principal accepts/ratifies unauthorized act

■ Principal has complete knowledge of all material facts regarding

■ Principal must ratify entirety of agent’s act


Agency Relationships

■ 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

■ Does worker engage in distinct occupation/independently established

■ 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

■ Compensation

■ Reimbursement and Indemnification

■ Cooperation

■ Safe Working Conditions


Agent’s Duties To Principal

■ Loyalty

■ Notification

■ Performance

■ Obedience

■ Accounting


Principal’s Rights and Remedies Against

■ Constructive Trust

■ Avoidance

■ Indemnification


Agent’s Rights and Remedies Against

■ Tort and Contract Remedies

■ Demand For An Accounting

■ Specific Performance


Chapter 34
Liability to Third Parties

and Termination

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

Chapter 34 Case Hypothetical and Ethical Dilemma

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?


Authority of Agent and Liability of Principal

■ 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

“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

“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

■ 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

■ 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

■ 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
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



Crime and Agency Relationships

■ 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

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

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

■ War


Chapter 35
Forms of Business


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

Chapter 35 Ethical Dilemma

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?”


Major Forms of Business Organizations

■ Sole Proprietorship

■ General Partnership

■ Limited Partnership

■ Corporation


Sole Proprietorship

■ 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

■ 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

■ 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

■ Profits taxed as income to partners


Advantages and Disadvantages of Partnership

■ 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

■ 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

■ Limited partner has no managerial/operational control over



■ 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

■ 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

■ 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


Limited Liability Company (LLC)

■ 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

■ 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

■ 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)

■ 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

■ 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

■ “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

■ Ace Hardware Corp.

■ Pizza Hut

■ UPS Store

■ Circle K

■ Papa John’s International,


Chapter 36
Partnerships: Nature,

Formation, and

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

Chapter 36 Case Hypothetical

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


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?


Partnership (Uniform
Partnership Act Definition):

“Association of two or more persons to
carry on as co-owners a business for profit”


Characteristics of Partnership

■ 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 No Partnership:

■ 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

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

■ Duty of Loyalty

■ Duty of Obedience

■ Duty of Care


Partnership Rights

■ 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

■ 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

■ 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


The Revised Uniform
Partnership Act (RUPA)

Revised version of Uniform Partnership Act
(UPA); use of RUPA varies from state to



Chapter 37

Termination and Limited

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

Chapter 37 Case Hypothetical

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

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

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

■ 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

■ Begins when partnership dissolves

■ Once partnership dissolved and assets liquidated and
distributed (“winding up”), partnership terminated


Partnership Dissolution

■ Definition: Partnership cessation

■ Partnership dissolution can result from:

■ Partner actions

■ Operation of law

■ Court action


Events Resulting in Partnership Dissolution

■ 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”

■ Partner dies

■ Partner adjudicated bankrupt

■ Partnership engages in illegal activity


Examples of Partnership Dissolution By “Court

■ 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

Activity of completing unfinished
partnership business, collecting and paying

debts, collecting partnership assets, and
taking inventory


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

■ Payment to partnership creditors

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

■ Payment of partners for invested capital

■ Payment of profits distributed to partners per terms of
partnership agreement


Limited Partnership

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

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

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


Requirements for Limited Liability (of Limited

■ 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

■ 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

■ Expiration of term established in certificate of limited partnership

■ Completion of objective established in certificate of limited

■ 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)

■ 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

Formation and


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

Chapter 38 Case Hypothetical

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
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


Characteristics of Corporations

■ Legal entity

■ Rights as person and citizen

■ Creature of state

■ Limited liability of

■ Unrestricted transferability of
corporate shares

■ Perpetual existence

■ Centralized management

■ Corporate taxation


Corporate Powers

■ 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

■ Implied Powers: Whatever actions necessary (within the law)
to execute express powers


Classifications of Corporations

■ Public/Private

■ For-Profit/Non-Profit

■ Domestic/Foreign/Alien

■ Publicly Held/Closely Held

■ S-Corporation

■ Professional Corporation


Public Versus Private Corporation

■ 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

■ 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

■ Domestic Corporation: Doing business within state of

■ 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

■ 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

■ 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


Formation of Corporation

■ 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

■ How much flexibility does the state grant to corporate

■ What rights do state statutes give to shareholders?

■ What restrictions does the state place on the distribution of

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


Legal Process of Incorporation

■ Selection of corporate name

■ Drafting and filing articles of incorporation

■ First organizational meeting held


Remedies For Defective Incorporation:

■ “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

■ 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

■ Debt Securities: Bonds (representing loans to
corporation from another party)

■ Equity Securities: Stock


Types of Debt Securities (Bonds):

■ 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


Equity Securities: Preferred Stock Versus
Common Stock

■ Preferred Stock: Stockholder enjoys preferences
regarding assets and dividends

■ Common Stock: Stockholder owns portion of
corporation, but no preferences regarding assets and


Chapter 39
Corporations, Directors,

Officers, and

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

Chapter 39 Case Hypothetical and Ethical Dilemma

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

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

■ Directors–

■ Officers–

■ Shareholders–

■ Vote on important corporate

■ Appoint and supervise officers
■ Declare and pay corporate

■ 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

■ Directors–

■ Officers–

■ Shareholders–

■ Right to Compensation
■ Right to Participation
■ Right to Inspection
■ Right to Indemnification

■ Rights determined in employment

■ 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

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

■ 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

■ 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

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

■ 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):

Minimum number of directors necessary to
validate corporate directors meeting


Proxy (Definition):

Provides authorization for third party to vote
in place of shareholder at shareholder’s



Voting Trust (Definition):

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

Provides that directors and officers are not
liable for decisions that harmed corporation
if they were acting in good faith at time of



“Watered” Stock

Stock issued to individuals at value
below fair market value


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

■ 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):

■ 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
individual/another corporation


Chapter 40
Corporations: Mergers,


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

Chapter 40 Case Hypothetical

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

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


In light of the potential negative impact on the community, how readily should a
state government use its involuntary corporate dissolution right?


Merger (Definition):

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):

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

■ 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

■ 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

■ 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

A takeover to which management of the
target corporation objects


Types of Takeovers

■ 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):

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)


“Legal Death” of Corporation

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

■ 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

■ 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


Reasons for Court-Ordered Involuntary
Dissolution of Corporation

■ 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

■ 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


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

Chapter 42 Case Hypothetical

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.

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)

■ 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)

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


Federal Unemployment Tax
Act (FUTA)

Created state system that provides
unemployment compensation to qualified

employees who lose their jobs


Workers’ Compensation Laws

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

■ To recover workers’ compensation benefits, injured party must

■ 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)

■ 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


The Employee Retirement Income Security Act

■ 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

■ 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

■ 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

■ 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…

■ Gender?

■ Race?

■ Political Party?

■ No Reason?

■ No

■ No

■ Yes

■ Yes


Employee Privacy in the Workplace

■ 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

■ 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)

■ 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

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


Labor Law (Continued)

■ National Labor Relations Board (NLRB)

■ Created by Wagner Act

■ Administrative agency formed to interpret and enforce National Labor Relations

■ 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

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

■ 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.

Chapter 43 Case Hypothetical and Ethical Dilemma

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.”

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?



■ 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

■ Provide minimum level of protection for employees

■ States may give employees more rights, but not less
rights, than they have under federal law (federal


Title VII of the Civil Rights Act (1964, As Amended
by the Civil Rights Act of 1991)

Protects employees against discrimination based on:

■ Race

■ Color

■ Religion

■ National Origin

■ Gender


“Disparate Treatment” Versus “Disparate Impact”

■ “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

■ Plaintiff-employee must demonstrate a “prima facie” case of

■ 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

■ Disparate Treatment (Intentional Discrimination)
■ Burden on Employee-Plaintiff: Demonstrate prima facie case of

■ Burden on Employer-Defendant: Articulate legitimate, non-

discriminatory business reason for action
■ Burden on Employee-Plaintiff: Show reason given by employer is “mere


■ 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

■ 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

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

■ 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…

■ Race?

■ Gender?

■ Religion?

■ Color?

■ National Origin?

■ Customer Preference?
(Exception: Sexual Privacy)

■ No

■ Yes

■ Yes

■ No

■ Yes

■ No


Procedure For Filing A Claim Under Title VII of the
Civil Rights Act

■ Charge Filed With EEOC

■ EEOC Conciliation Attempts

■ EEOC “Right-to-Sue” Letter


Age Discrimination in
Employment Act of 1967 (ADEA)

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

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


Americans With Disabilities Act

Prohibits discrimination against employees
and job applicants with disabilities


Who Is Protected Under ADA?

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

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

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

■ 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

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
The Nature of Property,
Personal Property, and


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

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?


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?


Categories of Property

■ Real Property: Land and anything permanently
attached to it (fixtures)

■ Personal Property: Property not attached to land, or
movable property


Transfer of Personal Property

■ 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

■ 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”

■ “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


Bailment (Definition):

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:

■ 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

■ 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

■ 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

■ Common Carriers (licensed to provide transportation
services to public)

■ Innkeepers (regularly in business of making lodging
available to public)


Chapter 49

Real Property

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

Chapter 49 Case Hypothetical and Ethical Dilemma

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.

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):
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



Exceptions To “Fixture” Status:

■ 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

■ 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)

■ 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

■ 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

■ 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)

■ 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


■ 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

■ Recording—filing deed with appropriate county office to protect
interests of grantee


Deed Requirements

■ 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

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

■ Grantor will provide grantee with any additional documents that grantee
needs to perfect his/her title to property


Other Types of Deeds:

■ 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:

■ 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

■ 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
Landlord-Tenant Law

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

Chapter 50 Case Hypothetical and Ethical Dilemma

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

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



Landlord-Tenant Law: Terminology

■ 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

■ 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
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

■ 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

■ 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


■ Landlord duty to put tenant
in possession

■ Landlord duty of covenant of
quiet enjoyment

■ Tenant duty not to commit

Corresponding Right

■ Tenant’s right to retain

■ Tenant’s right to quiet
enjoyment of the property

■ Landlord’s right to
reimbursement for tenant’s


Rights and Duties of Landlord and Tenant:
Terminology and Rules of Law (Continued)

■ Common Areas: Areas used by all tenants for which landlord is

■ 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)

■ 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

■ 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

■ 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

■ Sublease: Transfer of less than all of tenant’s interest in
leased property


Termination of Lease

■ 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


Do you need academic writing help? Our quality writers are here 24/7, every day of the year, ready to support you! Instantly chat with a customer support representative in the chat on the bottom right corner, send us a WhatsApp message or click either of the buttons below to submit your paper instructions to the writing team.

Order a Similar Paper Order a Different Paper