BUS LAW 10-20%

Question 1

Contracts for services are governed by

Answer 1

Common law

Question 2

What happens when a party that has been declared incompetent by a court, enters into a contract?

Answer 2

The contract is void, neither side can enforce the contract, and courts do not honor it.

Question 3

What is a bilateral contract?

Answer 3

A promise in exchange for a promise, creating a contract.

Question 4

Describe a unilateral contract

Answer 4

A promise in exchange for performance. (Can only be accepted by performing an act. )

Question 5

What type of contracts can be modified without new consideration?

Answer 5

UCC contracts for the sale of goods can be modified without new consideration.

Question 6

Contracts that cannot be performed within one year are not enforceable unless they are in writing. What is the exception to this rule?

Answer 6

If a contract has been finished, or fully performed, a party may then sue to enforce payment, even if the contract is not in writing.

Question 7

According to UCC rules, what obligation does the buyer assume when rejecting perishable goods?

Answer 7

The buyer is obligated to hold the goods for the seller and await instructions. If the seller does not give timely instructions, the buyer is authorized to sell the goods.

Question 8

When does the statute of limitations for an alleged breach of contract commence?

Answer 8

On the date of the breach.

Question 9

What is the general limit set by the statute of limitations on the amount of time a party may wait before bringing a lawsuit?

Answer 9

4 years. The time does not begin to run until the contract is breached

Question 10

At what point does title/ risk of loss pass when the terms are FOB the seller’s place (city, business, warehouse, or ship point)?

Answer 10

Delivery of conforming goods to carrier

Question 11

What is recission

Answer 11

The annulment of the contract whereby parties are placed in the position they held before the contract was formed. All benefits received from the contract must be returned by both parties.

Question 12

Under UCC rules what is the remedy for the buyer in a breach situation?

Answer 12

The remedy for the buyer in a breach situation consists of what it takes to compensate the buyer for the breach. Compensatory damages would include any additional amounts the buyer has to pay to purchase the item, as well as any expenses in finding the item, and perhaps shipping costs.

Question 13

What is a liquidated damage provision? What clause within the provision would result in the making the contract unenforceable?

Answer 13

Liquidated damage provisions are when parties can agree in advance of a breach the amount of damages to be paid in the event of a future breach.
To be valid/ enforceable, at the time the contract was entered into, damages must be difficult to estimate in the event of a breach, and the damages must be a reasonable estimate (not excessive). If the amount is unreasonable (excessive) the clause is deemed to be a penalty, and the clause is unenforceable.

Question 14

What authority cannot exist in an undisclosed principal/ agent relationship?

Answer 14

Apparent authority. Because the existence of the principal ( as well as identity) is unknown, it is not possible for a third party to rely on representations or appearances to create authority.

Question 15

What are the 3 requirements to create a security interest?

Answer 15

1. Creditor must give value
2. Debtor must have rights in the collateral (cannot offer friend’s car as collateral) and
3. Creditor must take possession of the collateral or obtain an agreement with the debtor.

Question 16

How does a security interest perfect? (2 ways)

Answer 16

By filing a financing agreement. (The debtor must agree to the creation of the security interest.)
OR
If the sale is made to a consumer on credit. Then perfection is automatic, and a financing agreement does not need to be filed. AKA - Purchase Money Security Interest (PMSI) in consumer goods

Question 17

How long do financing statements last?

Answer 17

5 years, but can be re-filed indefinitely every 5 years.

Question 18

What are the two exceptions to a security interest perfecting without having to file a financing statement?

Answer 18

1. If the sale is made to a consumer, on credit.
   Example: Buying a TV on credit from a store with credit extended from the store itself.
2. Security interest created by assignment of a beneficial interest in a decedent’s estate

Question 19

What is the order of priority for creditors?

Answer 19

From From highest level of security to lowest:

• Perfected security interest in some collateral
• Unperfected security interest
• Unsecured creditors
• Lien creditors, where the interest was perfected before the lien attached.
• Judgement liens, where the interest was perfected before the judgment lien attached.

Question 20

When does a creditor have a valid oral security agreement?

Answer 20

When the creditor is already in possession of the collateral.

Question 21

Usually the first security interest to be perfected has top priority, what is the exception?

Answer 21

Purchase money security interests. A PMSI in noninventory collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter.

Question 22

Under Article 9, if a debtor pays at least 60% of the PURCHASE PRICE (not including financing charges) and defaults, after repossession what must the creditor do?

Answer 22

If the debtor bas paid 60% of the PURCHASE PRICE, the creditor MUST sell the item.

Question 23

A Chapter 7 Involuntary petition may only succeed if the aggregate amount of unsecured claims of the petitioners equals or exceeds what amount?

Answer 23

$16,750

Question 24

What industry is NOT allowed to file a voluntary Chapter 7 petition?

Answer 24

Insurance companies

Question 25

What is KERP?

Answer 25

Key Employee Retention Plan - are payments made to nonmanagement and management employees. Those paid to management cannot be more than 10 times the average amount of retention payments to nonmanagement employees.

Question 26

What is an example of a preferential payment made within 90 days of filing for bankruptcy?

Answer 26

Prepaying an installment loan on inventory.
Any action by a debtor that gives a creditor an advantage over other creditors who would have priority in bankruptcy can be set aside as a voidable preference.

Question 27

Under the Bankruptcy code, what element must be established in order for the trustee in bankruptcy to void a preferential transfer to a creditor who is not an insider?

Answer 27

The transference-creditor received more than they would have received in a liquidation proceeding under Bankruptcy Code

Question 28

What is the order in which a debtor’s estate will be distributed?

Answer 28

(In order of priority)

• Perfected secured parties
• Claims for domestic support: Child support AND alimony
• Admin costs (attorney, accounting, and trustee fees, and appraisals)
• Employee wages: limited to those earned within 180 days of the filing, up to a max of $13,650. Anything above the limit, is classified as a “general creditor”
• Claims of farm producers & fisherman : up $6725
• Consumer creditors: up to $3,025 per creditor. Above limit = general creditor claim
• Claims of governmental units for taxes
• Claims for death or personal injury
• All general unsecured creditors
• Anything left is returned to debtor.

Question 29

What items are NOT discharged in bankruptcy?

Answer 29

• Claims arising from alimony/ child support
• Student loans
• Federal tax liens
• Debt acquired through false representations

Question 30

Under Section 11 of the 1933 Act, a plaintiff must show what three facts to win their claim?

Answer 30

1. There was a material misstatement in the registration statement on the effective date;
2. They can trace their shares to that registration statement; and
3. They suffered damages

Question 31

Under Section 11 of the 1933 Act must a defendant (other than the issuer) can win if they can establish what?

Answer 31

That they acted with due diligence

Question 32

What is the standard that must be established to prove a violation of the anti-fraud provisions of Rule 10b-5 of the SEC Act of 1934?

Answer 32

Intentional misconduct. To Courts hold that a defendant must act with scienter (intent) or extreme recklessness (similar to scienter) to be liable.

Question 33

What three facts must a plaintiff prove to win a Section 10(b) case of the SEC Act of 1934?

Answer 33

A CPA must have

1. Acted intentionally or recklessly;
2. Made a misstatement of material fact, or omitted a material fact;
3. That was relied upon by defendant

Question 34

What defense must an accountant establish to be absolved from civil liability under Section 18 of the SEC Act of 1934 for false or misleading statements made in reports or documents filed under the act?

Answer 34

Good faith, and lack of knowledge of the statement’s falsity.

Question 35

What remedies would the plaintiff (injured party) be subject to as a result of a Section 10(b) lawsuit?

Answer 35

Victims of a fraudulent misstatement are entitled to rescind the transaction OR recover their losses caused by their reliance on the false statements.

Question 36

What charges may the SEC bring against a plaintiff?

Answer 36

The SEC may bring civil charges. However, the DoJ may bring federal criminal charges.

Question 37

Most LLCs will provide limited liability protection for the member personally. What action will NOT protect the member from liability?

Answer 37

Members cannot be protected for liability for torts personally committed.

Question 38

With regards to closely held corporations, intentionally undercapitalization can lead to what?

Answer 38

Piercing the corporate veil, thus making the shareholders’ personal assets subject to judgement.

Question 39

In the absence of agreements to the contrary, how should profits be split in a partnership? What if initial capital contributions are uneven?

Answer 39

Unless distinguished in a partnership agreement, the profits/ ownership is split equally, regardless of initial capital contributions.

Question 40

What is a novation?

Answer 40

A novation is an agreement between three parties whereby a previous agreement is discharged by the creation of a new agreement. The new agreement substitutes one contracting party for another

Question 41

When a partnership is formed, what is the potential liability for the general, and limited partner?

Answer 41

General partners have unlimited liability.

Limited partners are subject to liability up to their capital contribution.

Question 42

A security interest attaches when the following occurs:

Answer 42

• The secured creditor gives value (provides the loan)
• The debtor has rights in the collateral (cannot offer something that does not belong to them)
• A security agreement exists

Question 43

A client suing a CPA for negligence must prove what factors:

Answer 43

Proof of due care & subsequent breach, injury, and cause including both cause-in-fact and proximate cause.

Question 44

Brenner Corporation is trying to avoid bankruptcy but its four creditors are trying to force Brenner into bankruptcy. The four creditors are owed the following amounts:

Anteed Corporation - $7,000 of unsecured debt
Bounty Corporation - $5,000 of unsecured debt and $8,500 of secured debt
Courtney Corporation - $3,000 of unsecured debt
Dauntless Corporation - $2,000 of unsecured debt

Which of the creditors must sign the petition to force Brenner into bankruptcy?

Answer 44

All of these four creditors are needed.

Since there are fewer than 12 creditors, it is true that only one creditor is needed to file the petition. However, no one creditor is owed at least $16,750 of unsecured debt. Therefore, the claims can be aggregated to total at least $16,750 of unsecured debt. The only way this can be accomplished is by aggregating the claims of all four creditors.