Sarah Nilsson JD, PhD, MAS
Sarah NilssonJD, PhD, MAS

BA 390 - part C

17 - Agency - Key Concepts


Agency law is concerned with your responsibility for the actions of others

All employees owe a duty of loyalty to their employers

Principal: in an agency relationship, person for whom an agent is acting

Agent: in an agency relationship, person who is acting on behalf of a principal

Principals have substantial liability for the actions of their agents

Restatement (3rd) of Agency: Agency is the fiduciary relationship that arises when one person (a "principal") manifests assent to another person (an "agent") that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act.

To create an agency:

  • principal
  • agent
  • who mutually consent that agent will act on behalf of the principal
  • be subject to principal’s control
  • thereby creating a fiduciary relationship


Consent: principal must ask agent to do something and agent must agree

Control: principals are liable for the acts of their agents because they exercise control over the agents

Fiduciary relationship: special relationship with high standards – beneficiary places special confidence in fiduciary who in turn is obligated to act in good faith and candor putting his own needs second – agents have a fiduciary duty to their principals


Duties of agents to principals

Duty of loyalty: agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship


Otsuka v. Polo Ralph Lauren Corporation


Outside benefits: agent may not receive profits unless principal knows and approves

Confidential information: agents can neither disclose nor use for their own benefit any confidential information they acquire during their agency

Competition with the principal: agents are not allowed to compete with their principal in any matter within the scope of the agency business

Conflict of interest between 2 principals: unless otherwise agreed agent may not act for 2 principals whose interest conflict

Secretly dealing with principal: if a principal hires an agent to arrange a transaction the agent may not become a party to the transaction without the principal’s permission

Appropriate behavior: agent may not engage in inappropriate behavior the reflects badly on principal – applies even to off-duty behavior


Duty to obey instructions: agent must obey her principal’s instructions unless the principal directs her to behave illegally or unethically

Duty of care: agent has a duty to act with reasonable care

Duty to provide information: agent has a duty to provide the principal with all information in her possession that she has reason to believe the principal wants to know


Principal’s remedies when the agent breaches a duty

  1. principal can recover from agent any damages the breach has caused
  2. if agent breaches duty of loyalty, he must turn over to principal any profits he has earned as a result of his wrongdoing
  3. if agent has violated her duty of loyalty, principal may rescind the transaction

Duties of principals to agents

Principal must:

  1. pay agent as required by the agreement
  2. reimburse agent for reasonable expenses
  3. cooperate with agent in performing agency tasks


Duties of Agents to Principals

Duties of Principals to Agents

Duty of loyalty

Duty to compensate per agreement

Duty to obey instructions

Duty to reimburse

Duty of care

Duty to cooperate

Duty to provide information



Terminating an agency relationship

Either the agent or the principal can terminate the agency relationship at any time

Term agreement: principal and agent can agree in advance how long the relationship will last

Achieving a purpose: principal and agent can agree that agency relationship will terminate when principal’s goals have been achieved

Mutual agreement: no matter what principal and agent agree at the start, they can always change their minds later on so long as the change is mutual

Agency at will: if they make no agreement in advance about the term of the agreement either principal or agent can terminate at any time

Wrongful termination: an agency relationship is a personal relationship – if agency relationship is not working out, courts will not force the agent and principal to stay together – either party always has the power to walk out – they may not, however, have the right

The agency agreement also terminates if either the principal or the agent becomes unable to perform his required duties

The agency agreement also terminates if the activity becomes illegal



Principal’s liability for contracts

Principal is liable on contracts entered into on her behalf by her agent if the agent is authorized – or even if the agent is not authorized but appeared to be so

3 types of authority:

  1. express authority: either by words or conduct, the principal grants an agent permission to act
  2. implied authority: agent has authority to perform acts that are reasonably necessary to accomplish an authorized transaction even if the principal does not specify them
  3. apparent authority: principal does something to make an innocent third party believe that an agent is acting with the principal’s authority even though the agent is not authorized

Agent’s liability for contracts

Depends upon how much the third party knows about the principal – disclosure is the agent’s best protection

Fully disclosed principal: agent is not liable for any contracts she makes on behalf of a fully disclosed principal (3rd party knows of his existence AND his identity)

Unidentified principal: 3rd party can recover from either the agent or the principal (3rd party knew of his existence but not his identity)

Jointly and severally liable: an injured 3rd party has the right to recover the full amount of her damages from one, some, or all of those who caused her harm – she may not recover more than 100% of her damages

Undisclosed principal: 3rd party can recover from either the agent or the principal (3rd party does not know of existence)


Principal’s liability for torts

Employer is liable for a tort committed by his employee acting within the scope of employment or acting with authority – aka respondeat superior (let the master answer)

2 kinds of agents:

  1. employees
  2. independent contractors

principal may be liable for the torts of an employee but generally is not liable for the torts of independent contractor

the more control the principal has over an agent the more likely that the agent will be considered an employee

courts consider whether:

  • principal supervises details of work
  • principal supplies tools and place of work
  • agents work full time for principal
  • agents receive a salary or hourly wages not a fixed price for the job
  • work is part of the regular business of the principal
  • principal and agents believe they have employer-employee relationship
  • principal is in business


Negligent hiring: principal is liable for the torts of an independent contractor IF the principal has been negligent in hiring or supervising her


Scope of employment: principals are liable only for torts that an employee commits within the scope of employment – meaning the act:

  • is one that employees are generally responsible for
  • takes place during hours the employee is generally employed
  • is part of principal’s business
  • is similar to the one the principal authorized
  • is one for which principal supplied the tools
  • is not seriously criminal

Authorization: an act is within the scope of employment, even if expressly forbidden, if it is of the same general nature as that authorized or if it is incidental to the conduct authorized

Abandonment: principal is liable for the actions of the employee that occur while the employee is at work, but not for actions that occur after the employee has abandoned the principal’s business

Employer is liable if employee is on a detour

Employer is NOT liable if employee is off on a frolic of his own


Zankel v. United States of America


Intentional torts: principal is NOT liable for the intentional torts of the employee unless (1) the employee intended to serve some purpose of the employer or (2) the employer was negligent in hiring or supervising this employee

Nonphysical harm: harm to reputation, feelings, or wallet


Agent’s liability for torts

Agents are always liable for their own torts – whether or not their principal is also liable – even if the tort was committed to benefit the principal

CHAPTER 17 test bank student.docx
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18 - Employment Law - Key Concepts


Basic common law rule of employment: unless workers had an explicit employment contract they were employees at will – an employee at will could be fired for a good reason, a bad reason, or no reason at all – in the absence of a specific legal exception the rule in the US is that an employee at will can be fired for any reason




National Labor Relations Act (NLRA) – 1935 aka Wagner Act

- prohibits employers from penalizing workers who engage in union activity (e.g. joining or forming a union)

- requires employers to “bargain in good faith” with unions


Family and Medical Leave Act (FMLA)

- guarantees both men and women up to 12 weeks of unpaid leave each year for childbirth, adoption, or a serious health condition of their own or in their immediate family (e.g. spouse, child, parent but NOT sibling or in-law)

- employee must be allowed to return to same or equivalent job with same pay and benefits

- applies to companies with at least 50 workers

- applies to employees who have been with company full time for at least a year


Health Insurance

Companies are not required to provide their employees with health insurance

In 2014, employers with more than 50 full-time employees must pay a penalty if they do not provide basic health insurance

Company insurance policies must cover employees’ children up to age of 26

Under Consolidated Omnibus Budget Reconciliation Act (COBRA) former employees must be allowed to continue their health insurance for up to 18 months after leaving their job – employees must pay for it themselves up to 102% of the cost – applies to companies with 20 or more workers


Common Law Protections

Major exception – wrongful discharge: an employer may not fire a worker for a reason that violates basic social rights, duties or responsibilities

Under the doctrine of wrongful discharge, an employer cannot fire a worker for a reason that violates public policy

Although the public policy rule varies from state to state, in essence, it prohibits an employer from firing a worker for refusing to violate the law, performing a legal duty, exercising a legal right, or supporting basic societal values


Kozloski v. American Tissue Services Foundation


Contract Law – courts have recently been willing to enforce an employer’s more casual promises, whether written or oral

Truth in hiring – oral promises made during the hiring process are enforceable

Employee handbooks – create a contract


Doe v. Department of Justice


Tort law

Defamation: employers may be liable for defamation when they give false and unfavorable references about a former employee

More than half of the states, however, recognize a qualified privilege for employers who give references about former employees

Qualified privilege: employers are liable only for false statements that they know to be false or that are primarily motivated by ill will

Generally, courts have held that employers do not have a legal obligation to disclose information about former employees

In some recent cases however courts have held that when a former worker is potentially dangerous employers do have an obligation to disclose this information


Intentional infliction of emotional distress (IIED): employers who permit cruel treatment of their workers face liability under the tort of IIED



Employees who disclose illegal behavior on the part of their employer

Protected in the following situations:



Workplace Safety

Congress passed the Occupational Safety and Health Act (OSHA) to ensure safe working conditions

Under OSHA:

  • employers are under a general obligation to keep their workplace free from hazards that could cause serious harm to employees
  • employers must comply with specific health and safety standards
  • employers must keep records of all workplace injuries and accidents
  • the Occupational Safety and Health Administration may inspect workplaces to ensure they are safe – may assess fines for violations and order employers to correct unsafe conditions

Employee privacy: employees are entitled under the common law to a reasonable expectation of privacy

Off-duty conduct: in the absence of a statute protecting the right of employees to engage in any lawful activity when off duty, an employer does have the right to fire an employee for off-duty conduct

Alcohol and drug testing: government employees can be tested for drug and alcohol sue only if they show signs of use or if they are in a job where this type of abuse endangers the public – federal government and some states permit private employers to administer drug and alcohol tests – Equal Employment Opportunity Commission (EEOC) federal agency charged with enforcing federal employment laws prohibits testing for prescription drugs unless a worker seems impaired

Lie detector tests: under Employee Polygraph Protection Act (1988) employers may not require or suggest that an employee or job candidate submit to a lie detector test except as part of ongoing investigation into crimes that have occurred

Electronic monitoring of the workplace: Electronic Communications Privacy Act (1986) permits employers to monitor workers’ telephone calls and email messages if (1) employee consents; (2) monitoring occurs in ordinary course of business; (3) for email the employer provides the email system

Social media: law is uncertain – err on the side of caution

Immigration: once immigrant is hired employer must complete I-9 – Employment Eligibility Verification within 3 days – and keep for 3 years after hire or 1 year after termination



Fair labor Standards Act (FLSA) regulates wages and limits child labor nationally

Provides that hourly workers must be paid minimum wage of $7.25 per hour plus time and ½ for any hours worked over 40 in one week

n/a for managerial, administrative, or professional staff

FLSA prohibits oppressive child labor – children under 14 may work only in agriculture and entertainment

14 and 15 year olds are permitted to work limited hours after school in non-hazardous jobs

16 and 17 year olds may work unlimited hours in non-hazardous jobs


Workers’ Compensation: provide payment to employees for injuries incurred at work – in return employees are not permitted to sue their employers for negligence


Social Security: federal social security system began in 1935 (Great Depression) – pays benefits to workers who are retired, disabled, or temporarily unemployed and to the spouses and children of disabled or deceased workers - medical insurance to the retired and disabled

Federal Unemployment Tax Act (FUTA) establishes some national standards but states are free to set their own benefit levels and payment schedules – while receiving payments a worker must make a good-faith effort to look for other employment – a worker who quits voluntarily or is fired for just cause is not entitled to benefits

CHAPTER 18 test bank student.docx
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19 - Employment Discrimination - Key Concepts


Equal Pay Act of 1963: employee may not be paid at a lesser rate than employees of the opposite sex for equal work (work that requires equal skill, effort, and responsibility under similar working conditions)


Title VII of the Civil Rights Act of 1964: illegal for employers to discriminate on the basis of race, color, religion, sex, or national origin – prohibits (1) discrimination in the workplace; (2) sexual harassment; and (3) discrimination because of pregnancy – permits employers to develop affirmative action plans under certain circumstances


Proof of Discrimination: 2 ways

  1. Disparate Treatment: to prove a disparate treatment case, plaintiff must show that she was treated differently because of her sex, race, color, religion, or national origin – first, (prima facie case) plaintiff presents evidence that defendant has discriminated against her because of a protected trait (presumption) – second, defendant must prevent evidence that its decision was based on legitimate, non-discriminatory reasons – third, plaintiff must show reasons offered were pretext

Jespersen v. Harrah’s

  1. Disparate Impact: applies if the employer has a rule that, on its face, is not discriminatory, but in practice excludes too many people in a protected group - first, plaintiff presents a prima facie case - that employment practice excludes a disproportionate number of people in a protected group - second, defendant must offer some evidence that employment practice was a job-related business necessity - third, plaintiff must prove either employer's reason is pretext or other less discriminatory rules would achieve the same results

Griggs v. Duke Power Co.


Color: Title VII prohibits discrimination based on both race and color

Transgender: federal court recently found Library of Congress in violation of Title VII for withdrawing offer to a man in the process of changing gender to become a woman

Retaliation: Title VII not only prohibits discrimination, it also penalizes employers who retaliate against workers for complaining about discrimination

Religion: employers must make reasonable accommodation for a worker’s religious beliefs unless the request would cause undue hardship for the business


Defenses to charges of discrimination – under Title VII defendant has 3

  1. Merit: defendant is not liable if he shows that the person he favored was the most qualified
  2. Seniority: a legitimate seniority system is legal even if it perpetuates past discrimination
  3. Bona Fide occupational qualification (BFOQ): an employer is permitted to establish discriminatory job requirements if they are essential to the position in question – business must show that it cannot fulfill its primary function unless it discriminates in this way


Affirmative action: not required by Title VII nor is it prohibited – 3 different sources

  1. Litigation: courts have power to order affirmative action to remedy past discrimination
  2. Voluntary action: employers can voluntarily introduce affirmative action plan to remedy effects of past practices or to achieve equitable representation of minorities and women
  3. Government contracts: 1965 Executive Order 11246 prohibits discrimination by federal contractors

1995: Supreme Court ruled that these affirmative action programs are permissible only if:

  1. the government can show that the programs are needed to overcome specific past discrimination
  2. they have time limits
  3. non-discriminatory alternatives are not available

Sexual Harassment: involves unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature

Quid pro quo: one thing in return for another – occurs if any aspect of a job is made contingent upon sexual activity

Hostile work environment: if sexual talk and innuendo are so pervasive that they interfere with his or her ability to work

Employees who commit sexual harassment are liable for their own wrongdoing

The Supreme Court has held that:

  1. if the victimized employee has suffered a tangible employment action (e.g. firing, demotion, reassignment) company is liable to her for sexual harassment by a supervisor
  2. even if victimized employee has not suffered a tangible employment action, company is liable unless it can prove that (1) it used reasonable care to prevent and correct sexually harassing behavior  and (2) employee unreasonably failed to take advantage of the company’s complaint procedures 

Procedures and Remedies

Before filing suit, plaintiff must file complaint with Equal Employment Opportunity Commission (EEOC) within 180 days of wrongdoing

EEOC then sues on behalf of plaintiff

If EEOC decides not to bring the case or does not make a decision within 6 months it issues a right to sue letter and plaintiff may sue on her own


Pregnancy: Pregnancy Discrimination Act of 1978 – employer may not fire or refuse to hire a woman because she is pregnant


Parenthood: courts have held that unequal treatment of mothers is a violation of Title VII


Age Discrimination in Employment Act (ADEA) of 1967 prohibits age discrimination against employees or job applicants who are at least 40 years old


Reid v. Google, Inc.


Americans with Disabilities Act (ADA) prohibits employers from discriminating on the basis of disability

Disabled person: someone with a physical or mental impairment that substantially limits a major life activity or someone who is regarded as having such an impairment

An employer may not refuse to hire or promote a disabled person so long as she can, with reasonable accommodation, perform the essential function of the job – an accommodation is not reasonable if it would create undue hardship for the employer

Reasonable accommodation: buying necessary equipment, providing readers or interpreters or permitting employees to work part-time

Undue hardship: relative cost is the issue and not absolute cost

Essential functions: 88% of job was found by one court as essential function


An employer may not ask about disabilities before making a job offer

Before making the job offer an employer cannot require applicants to take a medical exam unless

  1. job related and
  2. required of all applicants for similar jobs

Drug testing is permitted

After a job offer has been made an employer may require a medical test but it must be related to the essential functions of the job

An employer may not discriminate against someone because of his relationship with a disabled person

Under EEOC rules, physical and mental disabilities are to be treated the same


Genetic Information Nondiscrimination Act (GINA): under this statute employers with 15 or more workers may not require genetic testing or discriminate against workers because of their genetic makeup

CHAPTER 19 test bank student.docx
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20 - Labor Law - Key Concepts


ULP: unfair labor practices


Unions develop – key statutes

1932: Norris-LaGuardia Act – prohibited federal court injunctions in nonviolent labor disputes – Congress declared workers should be permitted to organize unions and to use their collective power to achieve legitimate economic ends


1935: National Labor Relations Act (NLRA) aka Wagner Act – aim is establishment and maintenance of industrial peace to preserve the flow of commerce – section 7 guarantees employees the right to organize and join unions, bargain collectively through representatives of their own choosing, and engage in other concerted activities – section 8 prohibits employers from engaging in the following unfair labor practices:

  • interfering with union organizing efforts
  • dominating or interfering with any union
  • discriminating against a union member
  • refusing to bargain collectively with a union

NLRA established the National Labor Relations Board (NLRB) to administer and interpret the statute and to adjudicate labor cases – the NLRB in Washington, DC has 5 members all appointed by the President – has no power to enforce its orders – so appeals to US Court of Appeals for enforcement


1947: Labor-Management Relations Act – aka Taft-Hartley Act – amended section 8 of NLRA to outlaw certain unfair labor practices by unions:

  • interfere with employees who are exercising their labor rights under section 7
  • encourage  an employer to discriminate against a particular employee because of a union dispute
  • refuse to bargain collectively
  • engage in an illegal strike or boycott, particularly secondary boycotts


1959: Labor-Management Reporting and Disclosure Act (LMRDA) aka Landrum-Griffin Act – requires union leadership to make certain financial disclosures and guarantees free speech and fair elections within a union


Organizing a Union

Exclusivity: under section 9 of the NLRA a validly recognized union is the exclusive representative of the employees

Collective bargaining unit: precisely defined group of employees represented by a particular union

Organizing – Stages:

  • campaign
  • authorization cards
  • petition – signed by at least 30% of workers
  • election – more than 50% of workers vote
  • the “card-check” debate – no election necessary


Organizing – Actions:

  • what workers may do – the NLRA guarantees employees the right to talk among themselves about forming a union, to hand out literature, and ultimately to join a union
  • what employers may do – management is entitled to communicate to the employees why it believes a union will be harmful to the company

Progressive Electric, Inc. v. NLRB


Appropriate bargaining unit

The NLRB generally certifies a proposed bargaining unit if and only if the employees share a community of interest (similarity of training, skills, hours of work, and pay)

Managerial employees must be excluded from the bargaining unit


Collective Bargaining

Collective Bargaining Agreement (CBA): contract between a union and management


  1. whether an issue is a mandatory subject of bargaining
  2. whether the parties are bargaining in good faith
  3. how to enforce the agreement


Subjects of Bargaining

NLRA permits the parties to bargain almost any subject they wish but requires them to bargain certain issues

Mandatory subjects include wages, hours, and other terms and conditions of employment

Subcontracting: means that a manufacturer rather than producing all parts of a product and then assembling them contracts for other companies frequently overseas to make some of the parts

Bargaining is mandatory if the subcontracting is designed to replace union workers with cheaper labor


Employer and union security

No strike/no lockout – these clauses are both legal

Union shop – membership in union becomes compulsory upon hiring – generally legal


Duty to bargain

Both the union and the employer must bargain in good faith

However they are not obligated to reach an agreement


NLRB v. Truitt Manufacturing Co.


Management may not unilaterally change wages, hours, or terms and conditions of employment without bargaining the issues to impasse


Enforcement: through grievance-arbitration

Grievance: a formal complaint alleging a contract violation

Arbitration: a formal hearing before a neutral party to resolve a contract dispute between a union and a company

Brentwood Medical Associates v. United Mine Workers of America


Concerted action: tactics taken by union members to gain bargaining advantage

Strikes: the NLRA guarantees employees the right to strike, but with some limitations

Replacement workers: management has the right to hire replacement workers during a strike

After an economic strike an employer may not discriminate against a striker but the employer is not obligated to lay off a replacement worker to give a striker his job back

After an unfair labor practice strike a union member is entitled to her job back even if that means the employer must lay off a replacement worker

Picketing: picketing the employer’s workplace in support of a strike is generally lawful

Secondary boycotts are generally illegal – picket line established not at an employer’s premises but at the workplace of a different company that does business with the union’s employer

Lockouts: legal if the parties have reached a bargaining impasse

CHAPTER 20 test bank student.docx
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21 - Starting a Business: LLCs and Other Options - Key Concepts


Sole proprietorships

An unincorporated business owned by one person


  • owner is responsible for all business debts
  • owner has limited options for financing her business


Limited Liability: shareholders of a corporation have limited liability – individuals are always responsible for their own acts

Transferability of interests: corporate stock can be easily bought and sold

Duration: perpetual existence even without founders

Logistics: require substantial expense and effort to create and operate

Taxes: taxable entities and so must pay taxes and file returns


S Corporations

Shareholders of S Corps have both the limited liability of a corporation and the tax status of a partnership


  • can only be one class of stock
  • can be no more than 100 shareholders
  • shareholders must be individuals, estates, charities, pension funds, or trusts, not partnerships or corporations
  • shareholders must be citizens or residents of the US, not nonresident aliens
  • all shareholders must agree that the company should be an S Corporation


Close Corporation

A company whose stock is not publicly traded – aka closely held corporation

  • protection of minority shareholders: charter could grant each shareholder veto power over all important corporate decision
  • transfer restrictions: shareholder must first offer shares to other owners before selling to outsider
  • flexibility: operate without a board of directors, formal set of bylaws, or annual shareholder meetings
  • dispute resolution: shareholders can agree in advance that any one of them can dissolve corporation upon a pre-agreed happening

Limited liability companies (LLCs)

Offers the limited liability of a corporation and the tax status of a partnership

Limited liability: members are not personally liable for the debts of the company


Ridgaway v. Silk


Tax status: as a partnership income flows through the company to the individual members, avoiding the double taxation of a corporation

Formation: to organize an LLC, you must have a charter and you should have an operating agreement, LLC v. Lieberman


Flexibility: members can be corporations, partnerships, or nonresident aliens

Transferability of interests: members of LLC must obtain the unanimous permission of the remaining members

Duration: continues in operation even after a member withdraws

Going public: once it goes public it loses its favorable tax status and is taxed as a corporation

Piercing the LLC veil: if corporate shareholders do not comply with the technicalities of corporation law they may be held personally liable for the debts of the organization


BLD Products, Ltd. V. Technical Plastics of Oregon, LLC


Legal uncertainty: new form or organization without a consistent and widely accepted body of law

Choices: LLC v. Corporation

  • tax status of LLC is a major advantage
  • c corps are easier to merge, sell, or take public
  • corporations can issue stock options
  • general legal uncertainty involving LLCs


General Partnerships

  • easy to form
  • do not pay taxes


  • liability: each partner is personally liable for the debts of the enterprise, whether or not she caused them
  • funding: firm cannot sell shares as a corporation does – so financing may be difficult
  • management: in the absence of agreement all partners have equal say in running business
  • transferability: partner only has the right to transfer the value of her partnership interest

Formation: partnership is an association of 2 or more co-owners who carry on a business for profit

Taxes: partnership is NOT a taxable entity – does not pay taxes itself

Liability: every partner is an agent of the partnership – partnership is also liable for any torts that a partner commits in the ordinary course of the partnership’s business – if a partnership does not have enough assets to pay its debts, creditors may go after the personal property of individual partners whether or not they were in any way responsible for the debt partners have joint and several liability – also even if creditors have a judgment against an individual partner, they cannot go after that partner’s assets until all the partnership’s assets are exhausted

Joint and several liability: an injured third party has the right to recover the full amount of his damages from one, some, or all of those who caused his harm – he may not recover more than 100% of his damages

Management: significant challenge

Management rights: unless the partnership agrees otherwise, partners share both profits and losses equally, and each partner has an equal right to manage the business  - large partnerships are always run by managing partners or members of the executive committee


Management duties: partners have a fiduciary duty to the partnership:

  • partners are liable to the partnership for gross negligence or intentional misconduct
  • partners cannot compete with the partnership
  • a partner may not take an opportunity away from the partnership unless the other partners consent
  • if a partner engages in a conflict of interest he must turn to the partnership any profits he earned from that activity

Terminating a partnership

A partnership begins with an association of 2 or more people

The end of a partnership begins with a dissociation – dissociation occurs when a partner quits

Dissociation: a partner always has the power to leave a partnership but may not have the right – the partnership can either buy out the departing partner(s) and continue the business or wind up the business and terminate the partnership

Term partnership: partners agree in advance how long the partnership will last

Partnership at will: partners can leave at any time, for any reason

3 steps of Termination

1. Dissolution – partnership automatically dissolves:

- in a partnership at will when a partner withdraws

- in a term partnership when (a) a partner is dissociated and half of the remaining partners vote to wind up the partnership business (b) all partners agree to dissolve or (c) term expires or partnership achieves its goal

- in any partnership when: (a) an event occurs that the partners had agreed would cause dissolution (b) the partnership business becomes illegal or (c) court determines that partnership is unlikely to succeed

2. Winding up: all debts are paid and remaining proceeds are distributed to partners

3. Termination: happens automatically


Limited Liability Partnerships (LLP)

Partners are not liable for the debts of the partnership


Limited Partnerships and Limited Liability Limited Partnerships

Structure: must have one limited partner and one general partner

Liability: limited partners are not personally liable, but general partners are

In a limited liability limited partnership the general partner is not personally liable for the debts of the partnership

Taxes: limited partnerships are not taxable entities

Formation: general partners must file a certificate of limited partnership with their Secretary of State

Management: general partners have the right to manage a limited partnership

Transfer of Ownership: limited partners have the right to transfer the value of their partnership interest but they can only sell or give away the interest itself if the partnership agreement permits

Duration: limited partnerships enjoy perpetual existence – even as partners come and go


Professional Corporation (PC)

Provide more liability protection than a general partnership


  • all shareholders of corp must be members of the same profession
  • required legal technicalities for forming and maintaining a PC are expensive and time-consuming
  • tax issues can be complicated



Most are corporations

Franchise agreements, which franchisor drafts, are usually one-sided

FTC – Federal Trade Commission – regulated franchises

Franchisor must deliver to a potential purchaser a so –called Franchise Disclosure Document (FDD) at least 14 calendar days before nay contract is signed or money is paid

FDD must provide information about franchise:

  • history
  • litigation
  • expenses
  • restrictions on products
  • suppliers and territory
  • other franchisees
  • audited financials


National Franchisee Association v. Burger King Corporation


CHAPTER 21 test bank student.docx
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22 - Corporations - Key Concepts


Promoter’s liability

Promoter: someone who organizes a corporation – personally liable on any contract he signs before the corporation is formed

Novation: a new contract – lets the promoter off the hook

After formation, the corporation can adopt the contract in which case both the promoter and the corporation are liable


Incorporation process

Corporate charter defines the corporation – includes company’s name and number of shares it will issue – aka articles of incorporation or certificate

Shareholders are aka stockholders

A company is called a domestic corporation in the state where it incorporates and a foreign corporation everywhere else

Delaware offers corporations several advantages:

  • laws that favor management
  • efficient court system
  • established body of precedent

The Charter

  • Name: must use “corporation” “incorporated” “company” or “limited” and must be different from any other company
  • address and registered agent: so everyone knows where to contact it and where to serve the complaint in state
  • incorporator: signs charter and delivers to Secretary of State for filing
  • purpose: must give purpose for existence
  • stock: must provide 3 items of information about stock
    • par value: some nominal figure e.g. 1 cent per share
    • number of shares: corporation can authorize as many shares as they choose but the more shares the higher the filing fee
    • treasury stock: stock that a company has sold but later bought back
    • classes of stock: corporation can issue different classes of stock
    • preferred stock: owners of preferred stock have preference on dividends and also typically in liquidation

After incorporation

Directors and Officers: at least 1 director required unless:

  1. all shareholders sign an agreement that eliminates the board or
  2. corporation has 50 or fewer shareholders


To elect directors the shareholders may hold a meeting or in a small company elect directors by written consent

Minute book; written consent and any records of actual meetings are kept in the minute book

Bylaws: document that specifies the organizational rules of a corporation such as the date of the annual meeting and the required number of directors

Quorum: percentage of stock that must be represented for a meeting to count


Death of the Corporation

Voluntary: shareholders elect to terminate the corporation

Forced: by court order

Piercing the corporate veil: court holds shareholders personally liable for the debts of the corporation   


Courts generally pierce the corporate veil in 4 circumstances:

  1. failure to observe formalities
  2. commingling of assets
  3. inadequate capitalization
  4. fraud



3-step process

  1. vote: majority of shareholders agree
  2. filing: of articles of dissolution with Secretary of State
  3. winding up: officers pay its debts and distribute remaining property to shareholders

Secretary of State may dissolve a corporation that violates state law by e.g. failing to pay annual fees


Role of Corporate Management

Manager: includes both directors and officers – have a fiduciary duty to act in the best interests of the corporation’s shareholders


Business Judgment Rule (BJR)

Courts allow managers great leeway in carrying out their fiduciary duty

To be protected by the BJR managers must act in good faith

2 parts to the BJR

1. Duty of Loyalty: without a conflict of interest – prohibits managers from making a decision that benefits them at the expense of the corporation

Self-dealing: means that a manager makes a decision benefiting either himself or another company with which he has a relationship – self-dealing transaction is valid in any one of the following situations:

  • the disinterested members of the board of directors approve the transaction
  • the disinterested shareholders approve it
  • the transaction was entirely fair to the corporation

2. Duty of Care: with the care that an ordinary prudent person would take in a similar situation and in a manner they reasonably believe to be in the best interests of the corporation


Lippman v. Shaffer


Corporate Opportunity

Managers are in violation of the corporate opportunity doctrine if they compete against the corporation without its consent


Duty of care: requires officers and directors to act in the best interests of the corporation and to sue the same care that an ordinarily prudent person would in a similar situation

  • decision must be legal
  • must have a rational business purpose
  • manager must have made an informed decision


Role of Shareholders

Shareholders have neither the right nor the obligation to manage the day-to-day business of the enterprise

Under the Model Act shareholders acting in good faith and with proper purpose have the right to inspect and copy the corporation’s minute book, accounting records, and shareholder lists


Right to vote

A corporation must have at least one class of stock with voting rights

Shareholder meetings: annual shareholder meetings are the norm for publicly traded companies

Proxies: card the shareholder signs to appoint a substitute voter

The company must also give shareholders a proxy statement and an annual report

Proxy statement: provides information on everything from management compensation to a list of directors who miss too many meetings

Annual report: contains detailed financial data


Election and removal of directors

Plurality voting: traditional corporate voting method – to be elected a candidate only needs to receive more votes than her opponent not a majority of the votes cast

Independent directors: not employees of the company

Shareholder activities: proxy advisers (e.g. Institutional Shareholder Services, Inc. (ISS)) – boards are responsive and likely to replace executives who perform badly

Majority Voting Systems

Proxy Access


Compensation for Officers and Directors – the problem

Directors, not shareholders, set executive compensation

Benchmarking games

The CEO gets all the credit

Most executives are above average

Compensation consultants often have conflicts of interest


Compensation for Officers and Directors – the solution

The federal government has begun to respond to these perceived abuses

  • proxy rules
  • SOX
  • Dodd-Frank


Brehm v. Eisner


CHAPTER 22 test bank student.docx
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23 - Government Regulation: Securities and Antitrust - Key Concepts


2 major securities laws:

  1. The Securities Act of 1933
  2. The Securities Exchange Act of 1934


Security: any transaction in which the buyer invests money in a common enterprise and expects to earn a profit predominantly from the efforts of others


Securities Act of 1933

The 1933 Act requires that before offering or selling securities in a public offering the issuer must register the securities with the Securities and Exchange Commission (SEC)

Issuer: a company that sells its own stock

When an issuer registers securities the SEC does not investigate the quality of the offering

Material: important enough to affect an investor’s decision

Initial public offering (IPO): a company’s first public sale of securities

Secondary offering: any public sale of securities by a company after the initial public offering

Liability: under the 1933 Act the seller of a security is liable for making any material misstatement or omission either oral or written in connection with the offer or sale of a security


Registration Statement: must be filed to make a public offering – 2 purposes

  1. to notify SEC that sale of securities is pending
  2. to disclose information of interest to prospective purchasers

Prospectus: part of registration statement that is sent to SEC – all investors must receive a copy of the prospectus before purchasing stock

Sales effort: can solicit offers but not make sales

Going effective: once the SEC finishes the review of the registration statement it sends the issuer a comment letter listing required changes


Private offerings

Under the 1933 Act an issuer is not required to register securities that are sold in a private offering – the most common and important type of private offering is under Regulation D – Rule 505 under regulation D permits a company to sell up to $5 million of stock during each 12-month period subject to the following restrictions:

  • issuer can sell to an unlimited number of accredited investors but to only 35 unaccredited investors
  • company may not advertise the stock publicly
  • company need not provide information to accredited investors but must make some disclosure to unaccredited investors

accredited investors: institutions (such as banks and insurance companies) or wealthy individuals (with a net worth of more than $1 million or an annual income of more than $200,000)


Securities Exchange Act of 1934

Purpose of act is to provide investors with ongoing information about public companies

Registration – issuer must register with SEC if

  1. it completes a public offering under 1933 Act or
  2. its securities are traded on a national exchange  or
  3. it has at least 500 shareholders AND total assets that exceed $10 million

The 1934 Act requires public companies to file the following documents:

  • annual reports (Form 10-K)
  • quarterly reports (Form 10-Q)
  • form 8-K

in response to corporate scandals Congress passed the Sarbanes-Oxley Act of 2002 – requires each company’s CEO and CFO to certify that:

  • the information in the quarterly and annual reports is true
  • the company has effective internal controls
  • the officers have informed the company’s audit committee and its auditors of any concerns that they have about the internal control system


Section 10(b) and Rule 10b-5 prohibit fraud in connection with the purchase and sale of any security whether or not the security is registered under the 1934 Act – anyone who fails to disclose material information or makes incomplete or inaccurate disclosure is liable so long as the statement or omission was made willfully, knowingly, or recklessly


Short-swing Trading – Section 16

Designed to prevent corporate insiders – officers, directors and shareholders – who own more than 10% of the company from taking unfair advantage of privileged information to manipulate the market

2-pronged approach:

  • insiders must report their trades within 2 business days
  • insiders must turn over to the corporation any profits they make form the purchase and sale or sale and purchase of company securities in a 6-month period

Insider trading

Crime punishable by fines and imprisonment

The guilty party may also be forced to turn over to the SEC 3Xthe profit made


Chiarella v. US  


Rules on insider trading:

  • fiduciaries: someone who trades on inside information is liable only if he breaches a fiduciary duty – anyone who works for a company is a fiduciary
  • temporary insiders: even outsiders who work for a company temporarily e.g. lawyers and accountants are considered to be fiduciaries
  • possession: v. use of information – an insider may trade while in possession of material, nonpublic information  if she has committed in advance to a plan to sell those securities
  • tippers: insiders who pass on important secret information are liable even if they do not trade themselves so long as (1) they know the information is confidential and (2) they expect some personal gain
  • tippees: those who receive tips – tippees – are liable for trading on inside information even if they do not have a fiduciary relationship to the company so long as (1) they know the information is confidential (2) they know it came from an insider who was violating his fiduciary duty and (3) the insider expected some personal gain
  • misappropriation: person is liable if he trades in securities (1) for personal profit (2) using confidential information and (3) in breach of fiduciary duty to the source of the information


Blue Sky Laws

All states and DC also regulate the sale of securities – aka blue sky laws – because crooks were willing to sell naïve investors a piece of the great blue sky



Congress passed Sherman Act in 1890 to prevent extreme concentrations of economic power

2 categories

  1. Per se violation: an automatic breach of antitrust laws
  2. Rule of reason violation: an action that breaches antitrust laws only if it has an anticompetitive impact

The Sherman Act


Section 1 of the Sherman Act prohibits all agreements in restraint of trade – most common and most serious being horizontal price-fixing

When competitors agree on the prices at which they will buy or sell products their price-fixing is a per se violation of Section 1 of the Sherman Act


United States v. Trenton Potteries Company


Resale Price Maintenance (RPM)

Aka vertical price fixing means the manufacturer sets the minimum price that retailers may charge


Leegin Creative Leather Products, Inc. v. PSKS, Inc.



Under section 2 of the Sherman Act it is illegal to monopolize or attempt to monopolize a market

Having a monopoly is legal unless it is gained or maintained by using wrongful tactics:

  1. does the company control the market?
  2. How did the company acquire or maintain its control?


Predatory pricing

Occurs when a company lowers its prices below cost to drive competitors out of business – to win a predatory pricing case the plaintiff must prove 3 elements:

  1. the defendant is selling its products below cost
  2. the defendant intends that the plaintiff go out of business
  3. if the plaintiff does go out of business the defendant will be able to earn sufficient profits to recover its prior losses


The Clayton Act

Mergers: the Clayton Act prohibits mergers that are anticompetitive

Tying arrangement: an agreement to sell a product on the condition that a buyer also purchases another usually less desirable (tied) product

A tying arrangement is illegal under the Clayton Act if:

  • the two products are clearly separate
  • the seller requires the buyer to purchase the two products together
  • the seller has significant power in the market for the tying product
  • the seller is shutting out a significant part of the market for the tied product

Tying product: in a tying arrangement the product offered for sale on the condition that another product be purchased as well

Tied product: in a tying arrangement the product that a buyer must purchase as the condition for being allowed to buy another product


The Robinson-Patman Act (RPA)

It is illegal to charge different prices to different purchasers if:

1. The items are the same and

2. the price discrimination lessens competition

However it is legal to charge a lower price to a particular buyer if:

  1. the costs of serving this buyer are lower or
  2. the seller is simply meeting competition


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24 - Accountants' Liability - Key Concepts



Serve 2 masters – company management and investing public


To verify transactions accountants use 2 mirror image processes – vouching and tracing

Vouching: auditors choose a transaction listed in a company’s books and check backwards for original data to support it

Tracing: an auditor takes an item of original data and tracks it forward to ensure that it has been properly recorded throughout the bookkeeping process

GAAP: generally accepted accounting principles – rules for preparing financial statements

GAAS: generally accepted auditing standards - rules for conducting audits

IFRS: international financial reporting standards – set of international accounting principles that US companies may ultimately be required to follow in preparing financial statements


On the financial statements that indicates how accurately those statements reflect the company’s true financial condition – auditor has 4 choices:

  1. unqualified opinion: aka clean opinion – company’s financial statements fairly present its financial condition in accordance with GAAP - -less than clean opinion is warning to potential investors and creditors that something may be wrong
  2. qualified opinion: although the financial statements are generally accurate there is nonetheless an outstanding unresolved issue
  3. adverse opinion: in auditor’s view the company’s financial statements do not accurately reflect its financial position – company is being less than truthful
  4. disclaimer of opinion:

Congress responds to Enron: Sarbanes-Oxley Act (SOX) of 2002

The public company accounting oversight board (PCAOB) to ensure that investors receive accurate and complete financial obligation

Reports to the Audit Committee: of the client’s board of directors not to senior management

Consulting services: SOX prohibits accounting firms that audit public companies from providing consulting services to their audit clients

Conflicts of interest: accounting firm cannot audit a company if one of top officers has worked for the firm within the prior year and was involved in the company’s audit

Term limits on audit partners: after 5 years with a client the lead audit partner must rotate off the account for at least 5 years  - other partners must rotate off every 7 years for at least 2 years


Liability to clients


Engagement letter: written contract by which a client hires an accountant

Negligence: need to prove 2 elements

  1. the accountant breached his duty to his client by failing to exercise the degree of skill and competence that an ordinarily prudent accountant would under the circumstances
  2. the accountant’s violation of duty caused harm to the client


Oregon Steel Mills, Inc. v. Coopers and Lybrand, LLP


Common law fraud

An accountant is liable for fraud if

  1. she makes a false statement of a material fact
  2. she either knows it is not true or recklessly disregards the truth
  3. the client justifiably relies on the statement and
  4. the reliance results in damages


Breach of trust

Accountants have a legal obligation to

  1. keep all client information confidential and
  2. use client information only for the benefit of the client


Fiduciary duty

In a fiduciary relationship one party has an obligation

  1. to act in a trustworthy fashion for the benefit of the other person and
  2. to put that person’s interests first


Leber v. Konigsberg


Liability to Third Parties


Accountants who fail to exercise due care are liable to

  1. anyone they knew would rely on the information and
  2. anyone else in the same class


Ellis v. Grant Thornton



An accountant who commits fraud is liable to any foreseeable user of the work product who justifiably relied on it


Securities Act of 1933

Requires a company to register securities before offering them for sale to the public

Auditors are liable for any important misstatement or omission in the financial statements that they prepare for a registration statement if the investors lose money


Due diligence: an investigation of the registration statement


Securities Exchange Act of 1934

Public companies must file an annual report containing audited financial statements and quarterly reports with unaudited financials



In these filings under the 1934 Act an auditor is liable for making

  1. a misstatement or omission of an important fact
  2. knowingly or recklessly
  3. that the plaintiff relies on in purchasing or selling a security


Ernst and Ernst v. Hochfelder



Auditors who suspect that a client has committed an illegal act must notify the client’s board of directors


Joint and several liability

All members of a group are liable – they can be sued as a group or any of them can be sued individually for the full amount owing – but the plaintiff may not recover more than 100% of her damages


Criminal liability

Punishment may be a fine and imprisonment

  • the Justice Department has the right to prosecute willful violations under either the 1933 Act or the 1934 Act
  • the Internal Revenue Code imposes various criminal penalties on accountants for wrongdoing in the preparation of tax returns
  • many states prosecute violations of their securities laws


Other accountant-client issues

The accountant-client relationship

SEC rules require accountants to maintain independence from their clients – an auditor or her family must not maintain a financial or business relationship with the client

SEC rules on independence specifically prohibit accountants or their families from owning stock in a company that their firm audits


Accountant-client privilege

This privilege applies only in civil cases involving the IRS or the US government


Working papers

The accountant

  1. cannot show the working papers to anyone without the client’s permission (or a valid court order) and
  2. must allow the client access to the working papers
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25 - Consumer Law - Key Concepts


Congress empowered federal agencies to enforce consumer laws

Federal Trade Commission (FTC)

Congress recently created the Consumer Financial Protection Bureau (CFPB) to regulate consumer financial products and services including mortgages, credit cards, and private student loans



Section 5 of the FTC Act prohibits unfair and deceptive acts or practices

Deceptive acts or practices

Under the FTC Act an advertisement is deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer


Federal Trade Commission v. Direct Marketing Concepts, Inc.


Unfair practices

The FTC Act also prohibits unfair acts or practices


Bait and switch

FTC rules prohibit bait and switch advertisements: A merchant may not advertise a product and then disparage it to consumers in an effort to sell a different (more expensive) item

A practice where sellers advertise products that are not generally available but are being used to draw interested parties in so that they will buy other items


Merchandise bought by mail, telephone or online

He FTC has established the following guidelines on merchandise bought by mail, telephone or online

  • sellers must ship an item within the time stated or if no time is given within 30 days after receipt of the order
  • if a company cannot ship the product when promised it must send the customer a notice with the new shipping date and an opportunity to cancel – if the new shipping date is within 30 days of the original one and the customer does not cancel the order is still valid
  • if the company cannot ship by the second shipment date it must send the customer another notice – this time however the company must cancel the order unless the customer returns the notice indicating that he still wants the item


The FTC prohibits telemarketers from calling any telephone number listed on its do-not-call registry

Register your home and cell numbers with FTC online or call 888-382-1222


Unordered merchandise

Under section 5 of the FTC Act anyone who receives unordered merchandise in the mail can treat it as a gift


Door-to-door Sales

Under the FTC door-to-door rules a salesperson is required to notify the buyer that she has the right to cancel the transaction prior to midnight of the 3rd business day thereafter


Consumer Credit

Usury statutes: most states limit the maximum interest rate a lender may charge consumers

The penalty depending upon the jurisdiction: the borrower may be allowed to keep

  1. the interest above the usury limit
  2. all of the interest or
  3. all of the loan and the interest


Truth in lending Act (TILA)

Requires lenders to disclose the terms of a loan in an unpredictable and complete manner

Under TILA:

  • the disclosure must be clear and in a sensible order
  • the lender must disclose the finance charge
  • the creditor must disclose the annual percentage rate (APR)

Home mortgage loans

TILA prohibits unfair, abusive, or deceptive home mortgage lending practices

Under TILA (as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act) lenders:

  • must make a good faith effort to determine whether a borrower can afford to repay the loan
  • may not coerce or bribe an appraiser into misstating a home’s value
  • cannot charge prepayment penalties on adjustable rate mortgages
  • may not make loans that have balloon payments (very large payments as the end of the loan period)
  • may not charge excessive late fees

subprime loan: aka higher-priced mortgage loans - loan that has an above-market interest rate because the borrower is high-risk


Credit cards

Bill payment

2008 – Congress increased oversight of credit card companies – these companies:

  • cannot increase the interest rate, fees, or charges on balances a consumer has already run up unless she is more than 60 days late in making the minimum payment
  • must give 45 days notice before increasing a card’s APR
  • cannot charge late payment fees of more than $25 (unless one of the consumer’s last 6 payments was late, in which case the fee may be up to $35)
  • cannot charge late fees that are greater than the minimum payment owed
  • cannot charge interest on fees or on a bill that is paid on time or during a grace period
  • must apply any payments to whichever debt on the card has the higher interest rate
  • must offer consumers the right to set a fixed credit limit  - consumers cannot be charged a fee if the company accepts charges above hat limit unless the consumer has agreed to the fee
  • cannot issue credit cards to people under 21 unless the young person has income or the application is co-signed by someone who can afford to pay the bills, e.g. parent or spouse


Stolen Cards

Now under the TILA you are liable only for the first $50 in charges the thief makes before you notify the credit card company


Disputes with Merchants

In the event of a dispute between a customer and a merchant the credit card company cannot bill the customer if

  • she makes a good faith effort to resolve the dispute
  • the dispute is for more than $50 and
  • the merchant is in the same state where she lives or within 100 miles of her house


Disputes with the credit card company

Under the Fair Credit Billing Act (FCBA)

  • if within 60 days of receipt of a bill a consumer writes to a credit card company to complain about the bill the company must acknowledge receipt of the complaint within 30 days
  • within 2 billing cycles (but no more than 90 days) the credit card company must investigate the complaint and respond
  • the credit card company cannot try to collect the disputed debt or close or suspend the account until it has responded to the consumer complaint
  • the credit card company cannot report to credit agencies that the consumer has an unpaid bill until 10 days after the response – if the consumer still disputes the charge the credit card company may report the amount to a credit agency but must disclose that it is disputed


Debit Cards – work like checks so aka check cards

Stolen cards

Your liability for a stolen debit card is much greater

If you report the loss before anyone uses the card you are not liable

If you report the theft within 2 days of discovering it the bank will make good on all losses above $50

If you wait until after 2 days the bank will only replace stolen funds above $500

After 60 days all losses are yours



Banks are not allowed to overdraw an account and charge you a fee unless the consumer signs up for an overdraft plan


Credit reports

Fair Credit Reporting Act (FCRA) and Fair and Accurate Credit Transactions Act (FACTA) regulate credit reports

Consumer reporting agencies are businesses that supply consumer reports to third parties e.g. credit card companies, banks, employers


Under FCRA:

  • consumer report can be used only for a legitimate business need
  • consumer reporting agency cannot report information that is more than 7 years old (in the case of bankruptcies limit is 10)
  • employer cannot request a consumer report on an employee or potential employee without the employee’s permission
  • anyone who penalizes a consumer because of a credit report must reveal the name and address of the reporting agency that supplied the information
  • upon request from a consumer a reporting agency must disclose all information in his file
  • if consumer tells an agency that some of the information in his file is incorrect the agency must investigate – consumer also has the right to give the agency a short report telling his side of the story



Consumers are entitled by law to one free credit report every year from each of the 3 major reporting agencies – Equifax – Experian – TransUnion


Debt collection

Congress passed the Fair Debt Collection Practices Act (FDCPA) because it was concerned that abusive practices could contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of privacy

The statute provides that a collector must, within 5 days of contacting a debtor, send the debtor a written notice containing the amount of the debt, the name of the creditor to whom the debt is owed, and a statement that if the debtor disputes the debt (in writing), the collector will cease all collection efforts until it has sent evidence of the debt

Under the FDCPA collectors may not:

  • call or write a debtor who has notified the collector in writing that he wishes no further contact
  • call or write a debtor who is represented by an attorney
  • call a debtor before 8am or after 9pm
  • threaten a debtor or use obscene or abusive language
  • call or visit the debtor at work if the consumer’s employer prohibits such contact
  • threaten to arrest consumers who do not pay their debts
  • make other false or deceptive threats – threats that would be illegal if carried out or which the collector has no intention of doing e.g. suing the debtor or seizing property
  • contact acquaintances of the debtor for any reason other than to locate the debtor (and then only once) or
  • tell acquaintances that the consumer is in debt

Equal credit opportunity act (ECOA)

Prohibits any creditor from discriminating against a borrower because of race, color, religion, national origin, sex, marital status, age, or because the borrower is receiving welfare

Lender must respond to a credit application within 30 days


Treadway v. Gateway Chevrolet Oldsmobile, Inc.


Consumer Leasing Act (CLA)

Applies to any lease up to $50,000 except for leases on real property (houses and apartments)

Applied most often to car leases

Before a lease is signed a lessor must disclose the following in writing

  • number and amount of all required payments
  • total amount the consumer will have paid by the end of the lease
  • annual mileage allowance
  • maintenance requirements and a description of the lessor’s wear and use standards
  • consumer’s right to purchase the leased property and at what price
  • consumer’s right to terminate a lease early


Magnuson-Moss Warranty Act

Does not require manufacturers or sellers to provide a warranty on their products

The Act does require any supplier that offers a written warranty on a consumer product that costs more than $15 to disclose the terms of the warranty in simple, understandable language before the sale

Full warranty: warrantor must promise to fix a defective product for a reasonable time without charge


Consumer Product Safety

1969 Consumer Product Safety Act (CPSA) – to prevent injuries  - to evaluate consumer products and develop safety standards



CHAPTER 25 test bank student.docx
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26 - Environmental Law - Key Concepts



When people do not bear the full cost of their decisions

Violations of environmental law result in liability for civil damages and criminal penalties under the Clean Water ActResource Conservation and Recovery ActEndangered Species Act


Air pollution

Clean Air Act – 1963

Requires the Environmental Protection Agency (EPA) to establish national air quality standards

SIPs – the Clean Air Act requires states to develop State Implementation Plans (SIPs) for meeting air quality standards set by the EPA


Central Arizona Water Conservation District v. EPA


New sources of pollution

Prevention of significant deterioration (PSD) program – no one may undertake a building project that will cause a major increase in pollution without first obtaining a permit from the EPA

Agency will grant permits only if applicant can demonstrate that:

  1. its emissions will not cause an overall decline in air quality and
  2. it has installed the best available control technology for every pollution


Greenhouse gases and global warming

Greenhouse gases (GHG) – burning of fossil fuels produces gases that create a greenhouse effect by trapping heat in the Earth’s atmosphere

International Treaties

Domestic Regulation

2007 – Supreme Court ruled that the EPA must regulate GHG if they were found to endanger health or welfare


Water Pollution

The Clean Water Act (CWA) – 1972

  • to make all navigable water suitable for swimming and fishing
  • to eliminate the discharge of pollutants into navigable water

CWA prohibits anyone from discharging pollution into water without a permit from the EPA


Entergy Corporation v. Riverkeeper, Inc.


Industrial Discharges

The CWA prohibits any single producer from discharging pollution into water without a permit from the EPA

Point source: a single producer of pollution


Water quality standards



CWA prohibits any discharge of dredge and fill material into wetlands without a permit



Under CWA a municipality must obtain a permit for any discharge form a wastewater treatment plan


Waste Disposal

Resource Conservation and Recovery Act (RCRA) – regulating the production, transportation, and disposal of solid wastes, both toxic and otherwise – regulates spills at RCRA-regulated facilities

Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) aka Superfund focuses on cleaning up inactive or abandoned hazardous waste sites


Resource Conservation and Recovery Act (RCRA)

  • bans new open garbage dumps
  • requires that garbage he sent to sanitary landfills
  • sets minimum standards for landfills
  • requires landfills to monitor nearby groundwater
  • requires states to develop a permit program for landfills
  • provides some financial assistance to aid states in waste management


RCRA: provides that anyone who creates, transports, stores, treats, or disposes of more than a certain quantity of hazardous wastes must apply for an EPA permit


Superfund (CERCLA)

Goal is to clean up hazardous wastes that have been improperly dumped in the past

The polluter pays!

Therefore, anyone who has ever owned or operated a site on which hazardous wastes are found, or who has transported wastes to the site, or who has arranged for the disposal of wastes that were released at the site, is liable for

  1. the cost of cleaning up the site
  2. any damage done to natural resources and
  3. any required health assessments



Under the Toxic Substance Control Act (TSCA) manufacturers must register any new chemicals (or any old chemicals used for a new purpose)


Natural resources

National Environmental Policy Act (NEPA) of 1969 requires all federal agencies to prepare an environmental impact statement (EIS) for every major federal action significantly affecting the quality of the human environment

EIS must discuss

  • environmental consequences of the proposed action
  • available alternatives
  • direct and indirect effects
  • energy requirements
  • impact on urban quality and historic and cultural resources
  • means to mitigate adverse environmental impacts

Endangered Species Act (ESA)

  • requires the Department of the Interior’s Fish and Wildlife Service (FWS) to prepare a list of species  that are in danger of becoming extinct
  • requires the government to develop plans to revive these species
  • requires all federal agencies to ensure that their actions will not jeopardize an endangered species
  • prohibits any sale or transport of these species
  • makes any taking of an endangered animal species unlawful (taking = harassing, harming, killing or capturing)
  • prohibits the taking of any endangered plant species on federal property


Gibbs v. Babbitt

CHAPTER 26 test bank student.docx
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27 - Cyberlaw - Key Concepts



Tracking Tools

Behavioral targeting: websites install thousands of tracking tools on the computers of people who visit them

Regulation of Online Privacy

Self-regulation – no consensus

The First Amendment – protects free speech


Juzwiak v. John/Jane Doe


The Fourth Amendment – prohibits unreasonable searches and seizures by the government


USA v. Angevine


USA v. Warshak


The courts are feeling their way in this new electronic territory – for criminal cases:

  • if your employer has a reasonably articulated policy notifying you that it has the right to access and read electronic communications on a system that it provides then you do not have a reasonable expectation of privacy when using that system – the police need not obtain a search warrant before reading your messages
  • you do have a reasonable right to privacy on a system that you provide for yourself so the police must obtain a warrant before accessing these messages



Section 5 of the FTC Act prohibits unfair and deceptive acts or practices


Electronic Communications Privacy Act (ECPA) of 1986

Federal statute hat prohibits unauthorized interception of, access to, or disclosure of wire and electronic communications

Under ECPA:

  1. any intended recipient of an electronic communication has the right to disclose it
  2. ISPs are generally prohibited from disclosing electronic messages to anyone other than the addressee
  3. An employer has the right to monitor workers’ electronic communications if: (1) the employee consents (2) the monitoring occurs in the ordinary course of business or (3) the employer provides the computer system in the case of email


Children’s Online Privacy Protection Act (COPPA) of 1998

Prohibits Internet operators from collecting information from children under 13 without parental permission – requires sites to disclose how they will use any information they acquire


State Regulation

Some states have passed their own online privacy laws



Unsolicited commercial email (UCE) or unsolicited bulk email (UBE)

The controlling the assault of non-solicited pornography and marketing act (CAN-SPAM)

Federal statute that does not prohibit spam but instead regulates it

Under this statute, commercial email:

  • may not have deceptive headings
  • must offer an opt-out system permitting the recipient to unsubscribe (and must honor those requests promptly)
  • must provide a valid physical return address (not a post office box)

Internet Service Providers and Web Hosts: Communications Decency Act (CDA) of 1996

Under the CDA ISPs and web hosts are not liable for information that is provided by someone else – only content providers are liable


Carafano v., Inc.


Crime on the Internet

Hacking: gaining unauthorized access to a computer system – crime under the federal Computer Fraud and Abuse Act (CFAA) of 1986

Applies to any computer, cell phone, iPod, or other gadget attached to the Internet

The CFAA prohibits:

  • accessing a computer without authorization and obtaining information from it
  • theft of information from the US government
  • computer fraud
  • intentional, reckless, ad negligent damage to a computer
  • computer extortion



Deception of another person for the purpose of obtaining money or property from him


Identity theft

Identity Theft and Assumption Defense Act of 1998

Prohibits the use of false identification to commit fraud or other crime and it also permits the victim to seek restitution in court

The Truth in Lending Act limits liability on a stolen credit card to $50

The Social Security Protection Act of 2010 prohibits government agencies from printing social security numbers on checks



When a fraudster sends an email directing the recipient to enter personal information on a website that is an illegal imitation of a legitimate site

Spear phishing

Involves personalized messages sent from someone the victim knows


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28 - Intellectual Property - Key Concepts


Intellectual property: new ideas for

  • manufacturing processes
  • computer programs
  • medicines
  • books



Grant by the government permitting the inventor exclusive use of an invention for a specified period (typically 20 years from date of filing)

Not available solely for an idea, but only for its tangible application

Not available for laws of nature, scientific principles, mathematical algorithms, or formulas


Business method patents


Courts unclear

Common in e-commerce

2011 America Invents Act: anyone charged with infringement of certain financial service business method patents will have the right from 2012 to 2020 to challenge the validity of that patent


Requirements for a patent

To receive a patent an invention must be:

  • novel: an invention is not patentable if (1) it is known or has already been used in this country (2) has been described in a publication here or overseas or (3) is otherwise available to the public
  • nonobvious: an invention is not patentable if it is obvious to a person with ordinary skill in that particular area
  • useful: need not necessarily be commercially viable but it must have some current use – being merely of scientific interest is not enough


Patent Application and Issuance

  • file complex application with PTO
  • if accepted patent is issued
  • if rejected appeal to Patent Trial and Appeal Board


Priority between 2 inventors

Prior to 2013 – first to put invention into practice had priority

After 2013 – first to file had priority


Prior sale

Inventor must apply for patent within 1 year of selling product commercially


Provisional patent application (PPA)

Simpler cheaper shorter application – allows inventors the opportunity to show their ideas to potential investors without incurring the full expense of the patent application

PPA protection lasts only 1 year


Patent trolls

Someone who buys a portfolio of patents for the purpose of making patent infringement claims


International Patent Treaties

The Paris Convention for the Protection of Industrial Property requires each member country to grant to citizens of other member countries the same rights under patent law as its own citizens enjoy

Patent Cooperation treaty (PCT): step toward providing more coordinated patent review across many countries

US PTO has bilateral agreements with 16 other patent offices under Patent Prosecution Highway



The holder of a copyright owns the particular expression of an idea but not the underlying idea or method of operation


Lapine v. Seinfeld


Copyright term

Today a copyright is valid until 70 years after the death of the work’s last living author or in the case of works owned by a corporation the copyright lasts 95 years from publication or 120 years from creation, whichever is shorter

Once a copyright expires anyone may use the material



To prove a violation of copyright, the plaintiff must present evidence that the work was original and that either:

  • the infringer actually copied the work or
  • the infringer had access to the original and the 2 works are substantially similar

Damages can be substantial


First sale doctrine

Permits a person who owns a lawfully made copy of a copyrighted work to sell or otherwise dispose of that copy


Fair use

Permits limited use of copyrighted material without permission of the author for purposes such as criticism, news reporting, scholarship, or research


Digital music and movies

Recording Industry Association of America (RIAA)

Developed a strategy of aggressively suing those who download large amounts of music illegally


Digital Millennium Copyright Act (DMCA)

Provides that:

  • it is illegal to delete copyright information such as the name of the author or the title of the article – also illegal to distribute false copyright material
  • it is illegal to circumvent encryption or scrambling devices that protect copyrighted works
  • it is illegal to distribute tools and technologies used to circumvent encryption devices
  • online service providers (OSPs) are not liable for posting copyrighted material so long as they are unaware that the material is illegal and they remove it promptly after receiving notice that it violates copyright law

International copyright treaties

The Berne Convention requires member countries to provide automatic copyright protection to any works created in another member country



Any combination of words and symbols that a business uses to identify its products or services and distinguish them from others


Ownership and registration

The first person to use a mark in trade owns it

Registration under the federal Lanham Act is not necessary

However registration has several advantages:

  • even if a mark has been used in only 1 or 2 states registration makes it valid nationally
  • registration notifies the public that a mark is in use which is helpful because anyone who applies for registration first searches the Public Register to ensure that no one else has rights to the mark
  • the holder of a registered trademark generally has the right to use it as a Internet domain name

Trademark is valid for 10 years and can be renewed for an unlimited number of times each for 10-year terms


Valid trademarks

To be valid a trademark must be distinctive – mark must clearly distinguish one product from another

The following are NOT distinctive and CANNOT be trademarked

  • similar to an existing mark
  • generic trademarks
  • descriptive marks
  • names
  • scandalous or immoral trademarks

Network Automation, Inc. v. Advanced Systems Concepts, Inc.


Domain names

Internet addresses

The Anticybersquatting Consumer Protection Act permits both trademark owners and famous people to sue anyone who registers their name as a domain name in bad faith

The rightful owner of a trademark is entitled to damages up to $100,000


International Trademark Treaties

Under the Paris Convention if someone registers a trademark in one country then he has a grace period of 6 months during which he can file in any other country using the same original filing date

Under the Madrid Agreement any trademark registered with the international registry is valid in all signatory countries (including US)

The Trademark Law Treaty simplifies and harmonizes the process of applying for trademarks around the world

PTO sends the application to the World Intellectual Property Organization (WIPO), which transmits it to each country in which the applicant would like trademark protection  


Trade Secrets

A formula, device, process, method, or compilation of information that, when used in business gives the owner an advantage over competitors who do not own it


Pollack v. Skinsmart Dermatology and Aesthetic Center 


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29 - Real Property and Landlord-Tenant Law - Key Concepts


3 categories of property:

  • real
  • personal
  • intellectual


Real property:

  • land (includes anything underground “subsurface rights” and some amount of airspace above land “air rights”)
  • buildings
  • plant life (naturally occurring or cultivated)
  • fixtures (goods that have become attached to real property) e.g. furnace and heating ducts – an object is a fixture if a reasonable person would consider the item to be a permanent part of the property, taking into account attachment, adaptation, and other objective manifestations of permanence


Attachment: if an object is attached to property in such a way that removing it would damage the property it is probably a fixture


Adaptation: something that is made or adapted especially for attachment to the particular property is probably a fixture


Other manifestations of permanence: if the owner of the property clearly intends the item to remain permanently it is probably a fixture


Concurrent Estates

2 or more people owning property at the same time


Tenancy in common: 2 or more people holding equal interest in a property but with no right of survivorship

Conveys: transfers the deed

Tenant in common has the power to leave his interest in the real property to his heirs

Partition: division of property – any co-tenant is entitled to demand and courts may have to decide – absolute right

Partition by kind: courts favor this – it actually divides the land equally among the co-tenants – if this is not possible the court will force the sale of land and divide the proceeds equally


Joint tenancy: 2 or more people holding equal interest in a property with the right of survivorship – owners must specify this type of concurrent estate otherwise the court will presume the owners were tenants in common

Once a joint tenant sells his interest the joint tenancy is severed – co-owners become tenants in common and right of survivorship is destroyed


Adverse possession

Allows someone to take title to land without paying for it, if she meets 4 specific standards:

  1. exclusive: entry and exclusive possession – user must take physical possession of the land and must be the only one to do so
  2. notorious: open and notorious – user’s presence must be visible and generally known in the area so that the owner is on notice that his title is contested
  3. adverse to all others: claim adverse to the owner – user must clearly assert that the land is his – he must act as if he is the sole owner
  4. continuous: continuous possession for the statutory period – originally 20 years but trend is now 10 years and few states now only require 5 years


Ray v. Beacon Hudson Mountain Corp.


Land Use Regulation


Zoning statutes: state laws that permit local communities to regulate building and land use


Eminent domain: power of the government to take private property for public use

5th Amendment of the US Constitution: nor shall private property be taken for public use without just compensation – Takings Clause – applies to federal government as well as state and local governments

Fair price: reasonable market value of the land

If the property owner refuses the government’s offer the government will file suite seeking condemnation of the land – court order specifying what compensation is just and awarding title to the government


Kelo v. City of New London, Connecticut


Landlord-Tenant Law

When an owner allows another person temporary, exclusive possession of the property the parties have created a landlord-tenant relationship

Landlord: owner – he had conveyed a leasehold interest to the tenant

Tenant: person allowed to possess the property

Tenancy: tenant’s right to possession

Leasehold: may be residential or commercial

Lease: contract that creates a landlord-tenant relationship

The Statute of Frauds generally requires that a lease be in writing

Well-drafted lease generally includes many provisions:

  • covenants: promise by either the landlord or the tenant to do something or refrain from doing something – generally tenants may be fined but not evicted for violating lease covenants
  • conditions: similar to covenant but allows landlord to evict tenant for violation


Types of tenancy

  1. Tenancy for years: any lease for a stated, fixed period – terminates automatically when the agreed period ends
  2. Periodic Tenancy: created for a fixed period and then automatically continues for additional periods until either party notifies the other of termination
  3. Tenancy at will: no fixed duration and may be terminated by either party at any time
  4. Tenancy at Sufferance: occurs when a tenant remains on the premises against the wishes of the landlord after the expiration of a true tenancy – landlord has the option of evicting or forcing tenant to pay for new rental period


Landlord’s Duties

Duty to deliver possession – make rented space available to tenant

Quiet enjoyment – all tenants are entitled to quiet enjoyment of the premises – right to use the property without the interference of the landlord e.g. eviction

2 types of eviction:

  • Actual: if a landlord prevents the tenant from possessing the premises he has actually evicted her
  • Constructive: if a landlord substantially interferes with the tenant’s use and enjoyment of the premises he has constructively evicted her

Duty to maintain premises: landlord has a duty to deliver the premises in a habitable condition and a continuing duty to maintain the habitable condition

Lease: generally obligates the landlord to maintain the exterior of any buildings and the common areas

Building codes: mandate minimum standards for commercial property, residential property or both – generally all rental property must comply with the building code whether or not the lease mentions it

Implied Warranty of Habitability: requires that a landlord meet all standards set by the local building code, or that the premises be fit for human habitation

Duty to return security deposit: landlord must either return the security deposit soon after the tenant has moved out or notify the tenant of the damage and cost of repairs – failure to do so means the landlord may owe 2 or 3 times the amount of the deposit to the tenant


Harris v. Soley


Tenant’s Duties

Duty to pay rent: rent is compensation the tenant pays the landlord for use of the premises

Duty to mitigate: keep losses at a minimum by seeking another tenant – today when a tenant breaches the lease the landlord must make a reasonable effort to mitigate damages

Duty to use premises properly: a tenant is liable to the landlord for any significant damage he causes to the property

Change in the parties

Sale of the property: generally the sale of leased property does not affect the lease but merely substitutes one landlord, the purchaser, for another, the seller

Assignment: tenant transfers all his legal interest to the other party – new tenant obtains all rights and liabilities under the lease – new tenant  is permitted to use and enjoy the property and must pay the rent – however the original tenant remains liable to the landlord unless the landlord explicitly releases him which the landlord is unlikely to do




Tenant’s Liability: tenant is generally liable for injures occurring within the premises she is leasing, whether that is an apartment, a store, or something else

Landlord’s Liability: landlord is responsible only for injuries that occurred in the common areas

Crime: landlords may be liable in negligence to tenants or their guests for criminal attacks that occur on the premises – courts look at:

  • nature of the crime
  • reasonable person standard
  • foreseeability
  • prevalence of crime in the area


Dickinson Arms-Reo, LP v. Campbell


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30 - Personal Property and Bailment - Key Concepts


Personal property: all tangible property other than real property

Gift: voluntary transfer of property from one person to another without consideration

Donor: person who gives property away

Donee: person who receives a gift of property

Gift involves 3 elements:

  1. donor intends to transfer ownership of the property to the donee immediately
  2. donor delivers the property to the donee – physical delivery is most common but not always necessary – constructive delivery done by transferring ownership without a physical delivery
  3. donee accepts the property

If all 3 elements are met then done becomes legal owner of the property

Inter vivos gift: gift made during donor’s life with no fear of impending death

Gift causa mortis: gift made in contemplation of approaching death


Albinger v. Harris


Found property

The primary goal of the common law has been to get found property back to its proper owner

Abandoned property: property that the owner has knowingly discarded because she no longer wants it

Lost property: property accidentally given up

Mislaid property: property the owner has intentionally placed somewhere and then forgotten


Armorie v. Delamirie


Bailment: rightful possession of goods by one who is not the owner, usually by mutual agreement between the bailor and bailee

Bailor: one who delivers the goods

Bailee: one who possesses the goods

Parties generally create a bailment by agreement

Involuntary bailment: bailment that occurs without an agreement between the bailor and bailee aka constructive bailment


Control: to create a bailment the bailee must assume physical control of an item with intent to possess


Rights of the bailee: anyone who interferes with the bailee’s rightful possession is liable to her

Duties of the bailee: bailee is strictly liable to redeliver the goods on time to the bailor or to whomever the bailor designates

Due care: the level of care required depends upon who receives the benefit of the bailment – 3 possibilities

  1. sole benefit of bailee – bailee is required to use extraordinary care with the property
  2. mutual benefit – bailee must us e ordinary care with the property
  3. sole benefit of bailor – bailee must use only slight care – aka gratuitous bailment – bailee liable only for gross negligence


Burden of proof

Opposite of ordinary negligence where plaintiff has burden of proof

Once the bailor has proven the existence of a bailment and loss or harm to the goods a presumption of negligence arises – burden shifts to bailee to prove adequate care


Johnson v. Weedman


Rights and duties of bailor

  • reverse of bailee’s
  • entitled to return of property on agreed-upon date
  • entitled to receive property in good condition
  • entitled to recover damages for harm to property if bailee failed to use adequate care


Liability for defects

If bailment is for sole benefit of bailee the bailor must notify the bailee of any known defects

In a mutual-benefit bailment the bailor is liable not only for known defects but also for unknown defects that the bailor could have discovered with reasonable diligence


Common carrier: company that transports goods and makes its services regularly available to the general public – generally strictly liable for harm to bailor’s goods

Contract carrier: company that transports goods for particular customers – does not incur strict liability


Innkeepers: most states have special innkeeper statutes that regulate liability

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31 - Estate Planning - Key Concepts


Estate planning: process of giving away property after (or in anticipation of) death

Estate: legal entity that holds title to assets after the owner dies and before the property is distributed

Decedent: person who has died

Testator (m or f) or Testatrix (f): someone who has signed a valid will

Intestate: to die without a will

Heir: someone who inherits from a decedent who died intestate

Devisee: someone who inherits under a will

(Note: many courts use the term heir for devisee as well)

Probate: process of carrying out the terms of the will

Executor (m or f) or Executrix (f): personal representative chosen by the decedent to carry out the terms of the will

Administrator (m or f) or Administratrix (f): personal representative appointed by the probate court to oversee the probate process for someone who has died intestate (or without appointing an executor)

Grantor or Settlor: someone who creates a trust

Donor: someone who makes a gift or creates a trust


Estate planning: 2 primary goals:

  1. to ensure that property is distributed as the owner desires
  2. to minimize estate taxes


Probate Law: National Conference of Commissioners on Uniform State Laws issued a Uniform Probate Code (UPC) – fewer than half of the states adopted it


Will: legal document that disposes of the testator’s property after death – can be revoked or altered at any time until death – should:

  • ensure that their assets are distributed in accordance with their wishes
  • select a personal representative to oversee the estate – if the decedent does not name an executor in a will, the court will appoint an administrator
  • avoid unnecessary expenses – those who die intestate often leave behind issues for lawyers to resolve – properly drafted will can also reduce estate tax bill
  • provide guardians for minor children – if parents do not appoint a guardian before they die, a court will

Requirements: a person may leave his assets to whomever he wants – but testator must be:

  • of legal age – 18 years
  • of sound mind – able to understand what a will is, more or less what she owns, who her relatives are, and how she is disposing of her property
  • acting without undue influence – one person has enough power over another to force him to do something against his free will

Legal technicalities:

  • will must be in writing
  • testator must sign it
  • generally 2 witnesses
  • usually a notarized will does not need 2 witnesses
  • no one named in will should serve as witness as they cannot inherit


Holographic will: will that is handwritten (by testator and NOT typed) and signed by testator but not witnessed

Nuncupative will: oral will – testator must know she is dying – 3 witnesses who all know they are listening to her will

Spouse’s share: spouse is entitled to a forced share of decedent’s estate (unless waived by written contract) – community property states spouse can override will and claim ½ of all marital property acquired during marriage, except property testator inherited or received as gift – non community property states spouse can also override will and claim some percentage of decedent’s probate estate

Children’s share: parents are NOT required to leave assets to their children – they may disinherit them for any reason

Pretermitted child: child who is left nothing in the parent’s will – law assumes it was an oversight unless parent clearly indicates intent to disinherit


In re Estate of Josiah James Treloar, Jr.


Issue: a person’s direct descendants, e.g. children and grandchildren

Per stirpes: each branch of the family receives an equal share

Per capita: each heir receives the same amount

Amending a will: testator can generally revoke or alter a will at any time prior to death

Codicil: amendment to a will

Intestacy: laws are based on what most people would prefer

Durable Power of Attorney: grants someone the authority to act for another person – valid even if the principal can no longer make decisions – attorney-in-fact need not be an attorney

(Note: power of attorney – expires if principal revokes it, becomes incapacitated, or dies – durable power of attorney – valid even if principal can no longer make decisions for herself)

Anatomical gifts: Uniform Anatomical Gift Act (UAGA) allows an individual to indicate her desire to be a donor either by putting a provision in her will or by signing an organ donation card in the presence of 2 witnesses

Living wills: in the event that a person is unable to make medical decisions, this document indicates her preferences and may also appoint someone else to make these decisions for her – aka advance directive

Health care proxy: someone who is authorized to make health care decisions for a person who is incompetent

Supreme Court: Upheld a Missouri law that family members cannot choose to discontinue treatment for an incompetent person unless there is a clear and convincing evidence the patient would have made that choice herself

Assisted suicide: process of hastening death for a terminally ill patient at the request of the patient


Trust: entity that separates the legal and beneficial ownership of assets

Grantor: someone who creates and finds a trust – aka settlor or donor

Trustee: someone who manages the assets of a trust

Beneficiary: someone who receives the financial proceeds of a trust

Trust advantages:

  • Control: grantor can control her assets after her death
  • Caring for children: minor children cannot legally manage property on their own
  • Tax savings: e.g. marital trust: legal entity created for the purpose of reducing a married couple’s estate taxes – e.g. generation-skipping trusts: to reduce their estate tax bill
  • Privacy: will filed in probate court becomes a latter of public record
  • Probate: trust assets do not go through probate
  • Protecting against creditors: asset-protection trusts – one can spend the trust funds himself but creditors have no right to the assets

Trust disadvantages:

  • Expense

Types of trusts:

Living Trust: trust established while the grantor is still alive - aka inter vivos trust

Revocable trust: trust that grantor can terminate or change at any time

Testamentary trust: trust that goes into effect when a grantor dies - created by a will - irrevocable 

Trust Administration: primary obligation of trustee is to carry out terms of trust – express powers and implied powers – have a fiduciary duty to beneficiary, which includes:

  • Duty of loyalty: trustees must put interests of beneficiaries first – must disclose any relevant information to beneficiaries – may not mix their own assets with those of trust – may not do business with trust or favor one beneficiary over another
  • Duty of care: trustee must act as a reasonable person would when managing the assets of another – trustee must make careful investments – keep accurate records – collect debts owed the trust


Paradee v. Paradee


Termination: trust ends upon the occurrence of any of these events:

  • on the date indicated by the grantor
  • if the trust is revocable, when revoked by the grantor – even if trust is irrevocable, the grantor and all the beneficiaries can agree to revoke it
  • when purpose of the trust has been fulfilled
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32 - Insurance - Key Concepts


Person: an individual, corporation, partnership, or any other legal entity

Insurance: contract in which one person, in return for a fee, agrees to guarantee another against loss caused by a specific type of danger

Insurer: person who issues the insurance policy and serves as guarantor

Insured: person whose loss is the subject of the insurance policy

Owner: person who enters into the insurance contract and pays the premium

Premium: consideration that the owner pays under the policy

Beneficiary: person who receives the proceeds from the insurance policy

Insurance contract: insurance policy must meet all the common law requirements for a contract – meaning offer, acceptance, consideration

Purchaser of a policy makes an offer by delivering an application and a premium to the insurer – insurance company has the option of either accepting or rejecting – can accept by oral notice, by written notice, or by delivery of the policy or by written binder

Binder: short document acknowledging receipt of the application and premium – indicates policy is temporarily in effect but does not constitute final acceptance

Limiting Claims by the Insured

An insurance contract is not valid unless the owner has an insurable interest in the subject matter of the policy

  • Insurable interest: means that someone would suffer a loss if the insured event occurs – a person has an insurable interest if she would be harmed by the danger that she has insured against – the insurable interest can be no greater than the actual amount of loss suffered – a person always has an insurable interest in his own life and the life of his spouse or fiancée – parents and minor children also have an insurable interest in each other – creditors have a legitimate interest in someone who owes them money – life insurance provides for payments to a beneficiary upon the death of the insured
  • Misrepresentation: insurers have the right to void a policy if, during the application process, the insured makes a material misstatement or conceals a material fact – material means important to the insurer’s decision to issue a policy or set a premium amount (note: a lie can void a policy even if it does not relate to the actual loss)


Bad faith by the Insurer

Insurance policies often contain a covenant of good faith and fair dealing – can be violated by:

  • fraudulently inducing someone to buy a policy
  • unreasonably refusing to pay a valid claim or
  • refusing to accept a reasonable settlement offer that has been made to an insured


Goodson v. American Standard Insurance Company of Wisconsin


Types of Insurance

Property Insurance: aka casualty insurance – covers physical damage to real estate, personal property, or inventory from causes such as fire, smoke, lighting, wind, riot, vandalism, or theft

Life Insurance: really death insurance – provides for payments to a beneficiary upon the death of the insured – to replace at least some of the insured’s income so that her family will not be financially devastated

Term Insurance: purchased for a specific period e.g. 1, 5, or 20 years

Whole Life Insurance: aka straight life – designed to cover the insured for his entire life – portion of premiums pays for insurance and remainder goes into savings to become the cash value of the policy

Universal life: flexible combination of whole life and term

Annuity: Provides payment to a beneficiary during his lifetime – annuities are the reverse of life insurance – they make payments until death, whereas life insurance pays after death

Deferred annuity contract: owner makes a lump-sum payment but receives no income until some later date, say, in 10 or 20 years when he retires

Health Insurance: traditional health insurance plans are pay for service

Many insurers offer managed care plans

HMOs: health maintenance organizations – patient has a primary care physician who must approve all visits to specialists – patient can be treated only by doctors in the organization unless there is some extraordinary need for an outside specialist

Disability insurance: replaces the insured’s income if he becomes unable to work because of illness or injury

Liability insurance: reimburses the insured for any liability she incurs by accidentally harming someone else


Metropolitan Property and Casualty Insurance Company v. Marshall


Automobile insurance: combination of several different types of coverage – depending on state law – either mandatory or optional

  • Collision
  • Comprehensive
  • Liability
  • Uninsured motorist
CHAPTER 32 test bank student.docx
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