Business Law Flashcards
What is Agency Law?
Agency Law deals with someone’s ability to bind you to a contract with a third party
What is required for Agency to exist?
Both parties must consent to the relationship and intend for an Agency relationship to exist Agent owes Principal fiduciary duty Principal doesn’t owe Agent fiduciary duty A contract is NOT required and an Agency agreement is not based on Contract Law; Exception - If duties cannot be performed within a year; a signed writing is required
What is Actual Authority in an agency?
Actual Authority is what is expressly granted or is implied by the duties you expect the Agent to perform and is necessary to carry them out
What is Implied Authority in an agency?
When authority is expressly granted; it is implied that the agent has the authority to carry out the duties Does not include authority to sell or alter a business
What is Apparent (Ostensible) Authority in an agency?
Apparent Authority is based on the third party’s perspective - they believe that the Agent has the authority to enter into a contract based on: *Prior dealings with agent *Agent’s title leads the third party to believe they can enter into a contract *The Principal hires the Agent to carry out duties that normally carry with them the rights to enter into contracts
How is an Agency terminated?
*Both Agent and Principal agree to terminate *Principal fires Agent *Agent fires Principal *Agent breaches their contract by doing something like violating their obligation to act as a fiduciary to Principal
How do you terminate Apparent Authority?
*Let the public know *Let the people or entities that the Agent previously interacted with know *In cases of death; or Principal is otherwise not competent to contract; ALL authority is revoked
What is an Agency Coupled with an Interest?
Agent acquires an ownership interest in the Agency Can only be terminated early (before the interest expiration date) by the Agent Unless the Agency has a specific time limit spelled out in a contract; the Agent’s authority is irrevocable by the Principal
When is an employee an Agent; and when does this make the employer liable?
Employees are agents while acting within the scope of their duties. For employees who injure third parties while acting within the scope of their duties; both Employee and Employer are liable
When are Agents liable for torts (civil wrongs) they commit?
Agents are liable for torts (civil wrongs) committed whether they had authority or not
Are Agents who act outside of their authority liable?
Agents who act outside of their authority will be liable for the act Exception - Principal ratifies the contract which relieves Agent of liability In order to ratify; Principal must know all of the facts and must ratify before third party cancels agreement If Principal keeps the benefits of the contract; ratification is implied Contract must be 100% ratified or there is no contract
What is an Agent’s liability when acting for an undisclosed principle?
*Agent liable to third party even if acting within authority *Third party can sue both Principal and Agent if Principal becomes disclosed *Agent can then sue Principal
What are the requirements for a Power of Attorney (POA)?
Must be in writing Must be signed by person granting the POA Ends upon death of Principal General POA - Agent authorized to handle all affairs Special POA - Agent authorized to handle only specific affairs
What are the basic actions that occur in a bankruptcy?
Bankruptcy gives creditors protection from their creditors and stops them from either permanently (Chapter 7) or temporarily (Chapter 11 or 13) collecting a debt. The filing halts collection activity; grants automatic stay (with certain exceptions), and stops creditors from suing debtor.
For what debts does bankruptcy NOT stop collections?
Student Loans Income taxes from previous 3 years Alimony & Child Support Debts/judgements resulting from drunk driving Pension obligations Debts relating to SOX violations Debts arising from illegal activities Debts not listed in the bankruptcy filing
How does bankruptcy of a corporation affect the owner’s ability to file bankruptcy?
It doesn’t; because the corporation is a separate legal entity. Under bankruptcy; corporations are dissolved Under bankruptcy; individuals are discharged
What key action will cause a bankruptcy discharge to be denied?
If a debtor fails to keep good records or falsifies documents; a discharge will be denied
What are the basic characteristics of a Chapter 7 bankruptcy (liquidation)?
Discharges all non-exempt debt Can only be filed every 8 years from previous Chapter 7 filing Voluntary or involuntary filing Certain businesses are disallowed from Chapter 7 bankruptcies - Railroads; Banks; Insurance companies; Savings & loans (think: 7th inning RBIs)
What are the requirements for a voluntary bankruptcy filing under Chapter 7?
Must pass means test Your income must be below the median income for your state (Note - median; i.e. middle; not mean; i.e. average) Credit card companies made it harder for people to declare Chapter 7 when they lobbied Congress in 2005
What are the requirements for an involuntary bankruptcy filing under Chapter 7?
In some cases; your creditors can force you into Chapter 7 or Chapter 11 BK Creditors must be able to prove that they are not being paid on time (i.e. debtor is insolvent) or that within the past 120 days the debtor assigned a custodian of the secured property If 12+ unsecured creditors - at least 3 must file; claims must be in excess of $15325 If less than 12 unsecured creditors - only 1 must file; claim(s) must be in excess of $15325 Upon filing; a judge will declare an order for relief unless the debtor protests
What entities are disallowed from involuntary Chapter 7 bankruptcy filings?
Charities Farms
How can a debtor reclaim possession of their property from the interim bankruptcy under Chapter 7?
If the debtor pays the court-assigned bond to keep a property in an involuntary BK; they can reclaim possession of their property from the interim BK trustee
What are the basic characteristics of a Chapter 11 bankruptcy (business repayment) filing?
Allows a business a reprieve from creditors Creates a payment plan for the debt Business remains in operation At least 2/3 of each debt class of creditors must consent to reorganization Ch. 11 Involuntary petitions are allowed
What are the basic characteristics of a Chapter 13 bankruptcy (personal repayment) filing?
Similar to Chapter 11; but for individuals Gives individuals a reprieve from creditors Creates a payment plan for the debt Ch. 13 Involuntary petitions are not allowed
What are the duties and abilities of a bankruptcy trustee?
Represents the bankruptcy estate Can sue or be sued Oversees bankruptcy and watches for preferential creditor payments Oversees priority transfer of assets to creditors
How and when is a bankruptcy trustee appointed?
Optional - Creditors decide Can be elected by creditors or can be appointed by the court
What actions can a bankruptcy trustee take with respect to preferential creditor payments in a bankruptcy?
Trustee can void payments on antecedent (past) debts that occur within 90 days of a BK filing A Trustee cannot void a payment made to a creditor that is an even swap (contemporaneous exchange) and for new value A voidable preference must be on an old debt where the debtor is basically picking and choosing which creditors they send money to (AKA a voidable preference)
When can preferential transfers be voided by a bankruptcy (BK) trustee?
Made within One Year of BK to insider - Corporate officers/directors; Partners; Relatives Made within 3 Months of BK non-insider Creditor receives larger payment than BK liquidation would have granted
What is the treatment of a secured creditor in a bankruptcy?
Superior to claims of other types of creditors Can take either collateral or cash proceeds from the sale of an asset If collateral doesn’t satisfy amount owed; Secured Creditors become a general creditor for the difference.
What is the order of priority given to unsecured creditors in a bankruptcy?
- BK Trustee and Attorney fees get paid before all other unsecured credit cards 2. Salaries required to continue business once BK proceedings begin 3. Any claims filed resulting from business operations that occur after involuntary BK is filed 4. Wages owed to employees 5. Retirement contributions within last 6 months 6. Consumer deposits for undelivered goods 7. Child Support & Alimony 8. Taxes 9. Other general unsecured claims
What are key aspects of a bankruptcy involving a landlord or leases under Chapter 7?
The bankruptcy trustee can act in the best interest of the creditors and assign the leases under contract to the creditors The trustee has 60 days to assume leases on equipment after bankruptcy is granted or the leases will be rejected
What is the bankruptcy estate?
The pool of assets available to creditors until liquidation
What assets are exempt from creditors in a bankruptcy estate?
Social security Disability payments Unemployment; Child Support; Alimony; Wages; Pensions; Annuities to the extent that they provide reasonable support for debtor and dependents
How long after a Chapter 7 bankruptcy filing can creditors claim inheritance or insurance payments for repayment?
Inheritance/Insurance payments received within 180 days of filing for a Chapter 7 bankruptcy become part of the BK Estate
What is a garnishment with respect to a bankruptcy?
Court allows a creditor to garnish or take a portion of the debtor’s paycheck
What is a mechanics lien?
Lien on real property to secure payment for a repair/improvement done to the house A contractor builds an addition to your house and you won’t pay. They can’t repo your house; so they get a Mechanics Lien that sticks until you sell your house and they get paid
What is an artisan’s lien?
Applies to personal property like a car If the dealership does $500 in repairs to your car; you don’t get the car back until you pay
What is a surety (co-signing)?
A third party agrees to be liable for a loan Example: A parent co-signs on their child’s car loan
How is a surety liable in a transaction?
A surety is primarily liable Surety can be released from liability if the creditor behaves in a way that increases the risk that they initially agreed to Surety can be released from liability if the debtor changes the loan agreement in a way that materially increases the surety’s risk
What is a cosurety; and how are they liable in a transaction?
Two sureties are guaranteeing the same debt Proportionately liable - If one cosurety is released from their obligation; then the remaining cosureties have their proportionate share reduced by the released party’s percentage If one surety pays more than their proportionate share of the risk; then the other sureties must compensate them for the difference; which is called Right of Contribution
What is a guarantor?
Similar to surety; but a guarantor is secondarily liable
What are the basic rights of a debtor under the Fair Debt Collection Practices Act?
Basically - your creditors have the right to collect from you; but not abuse you or embarrass you The can’t contact you once you’re represented by an attorney They can call other people to find out where you are; but they cannot identify themselves as collectors They must stop calling you at work if you send them a certified letter that says my employer doesn’t allow me to take calls at work. They must call you only at reasonable hours of the day - according to your time zone; not theirs
What are the key elements of a valid Partnership?
Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.
Can corporations and other partnerships become partners in a partnership?
Yes; corporations and other partnerships can become partners of a partnership
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN Intent is to make a profit
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds: A. Can’t be completed in 1 year B. Even if partners reside in different states; not necessary unless within Statute of Frauds C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing
How are profits shared in a partnership?
Profit sharing is equal by default A. Unless partnership agreement says otherwise B. Unless specified; sharing of losses follows same pattern as sharing of profits
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts Several Liability - Partners are individually liable for debts/torts
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs Unanimous vote needed to change the structure of the partnership Each partner has full right to inspect partnership accounting and business Partner has the authority to assign their interest to another partner
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
- Other party gets that partner’s share of the profits and/or capital contribution. 2. Does NOT give assignee authority to vote on partnership business 3. Assignee does NOT have right to inspect partnership books 4. Assignor still maintains liability 5. Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien.
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
What is the APPARENT authority of a partner in a partnership?
A third party reasonably believes partner has authority to bind partnership to contract Cannot use apparent authority to add a new partner Cannot use apparent authority to sell or bind partnership assets
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given. Notice must be given to nullify apparent authority People who had knowledge of their role must be personally notified Public must be notified
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
What happens upon the death of a partner in a partnership?
Partner’s estate gets share of partnership profits and capital account Estate does NOT get any partnership assets Remainder of partners own partnership assets Heirs of decedent are not added as partners unless remaining partners unanimously agree
What happens during the winding up of a partnership and in what order?
- Creditors get paid; Partners can also be creditors 2. Distributions in arrears get paid 3. Partners get return of Capital accounts 4. Any remaining distributions Note: NO documents need to be filed with state to dissolve general partnership.
What are the requirements to form a Limited Partnership?
Governed by state L.P. laws Must file L.P. certificate with Sec. of State Only General Partners must be listed Future additions or subtractions of G.P. require certificate to be updated with state
How are profits and losses split in a Limited Partnership?
Unlike G.P.; L.P. profits/losses are split according to capital contributions by default
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at the same time.
True. A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
What authority does a limited partner have under a Limited Partnership?
- Right to inspect records of the business. 2. Can still vote on partnership business without losing limited liability 3. Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
What limitations does a limited partner have in a Limited Partnership?
- They have no authority as an agent to bind the partnership 2. They can’t participate in management decisions and maintain limited liability.
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions Becomes liable to third parties *IF* they knew of their involvement
When does the dissolution of a Limited Partnership occur?
Automatically happens 1. Once final General Partner leaves 2. Time specified in certificate lapses 3. Event specified in certificate happens 4. Unanimous consent by partners 5. Illegal activity
What is required to form a Limited Liability Partnership (LLP)?
- Majority vote required to form LLP 2. Articles of LLP filed with Secretary of State 3. Governed by laws of that State 4.Limited Liability Partnership must be in name 5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner’s supervision
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability Members don’t own any interest in LLC property Members can assign interest; but not transfer it Members divide profits equally unless otherwise stated
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity Example: two companies promote a concert Ability to bind other JV partners is limited JV partners still have a fiduciary responsibility to JV No state filings or paperwork necessary
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution C Corporations have a perpetual life and continue even after shareholder death Corporations are a separate legal entity from their owners and can own property; sue; be sued Corporations must file Articles of Incorporation in state of governance
What are some of the advantages of a corporation?
Ability to raise capital Limited liability - unless actions occur that pierce the veil Ease of ownership transfer
What actions can pierce the veil of a corporation?
Commingling of assets Fraud Under-capitalization
How is a corporation governed?
Board adopts Corporate Bylaws to govern company business
What items are required in a corporations Articles of Incorporation?
Name; purpose; powers of Corporation Name of registered agent & incorporators Stock share classes authorized; par values Name of corporate officers NOT required
What is the biggest disadvantage of a corporation?
Double taxation
How are corporations formed by promoters?
Promoter issues prospectus; arranges capital; and is a fiduciary of the corporation. A promoter may profit from work performed if the corporation is aware of it.
When is a corporation liable for pre-incorporation actions taken by a Promoter?
Promoter personally liable unless third party agrees to a novation and releases Promoter from liability; UNLESS the corporation adopts.
In how many states must a corporation incorporate?
Corporations are only incorporated in one state Become adomestic corp. in that state Become aforeign corp. in any other state they do business in
Describe Common Stock dividends and their rights/liabilities in relation to shareholders/corporations.
Dividends are NOT a shareholder right Once declared; dividends become a liability to corporation
What are key aspects related to the holding of Preferred Stock?
No voting rights Get first rights to dividends and liquidation Cumulative Preferred Stock dividends that go undeclared accumulate and Corporation must pay it before issuing dividends to Common Stockholders Participating Preferred Stock gives shareholder right to dividends in addition to what they get as Preferred Stockholders
What aspects are related to all classes of corporate stock?
Valid consideration must be given for shares Cash; property; or services performed No promises to pay or perform services
What are the key aspects of Treasury Stock?
No Gain/Loss recognized on Treasury stock Have no voting rights Can be re-purchased below par Cannot produce dividends
What is a stock subscription and what is required for it to be valid?
An offer to buy shares of stock Must be accepted by corporation to be valid Offer cannot be revoked for 6 months Subscriber becomes liable once accepted
