Deck 1 Flashcards
How is a PMSI created?
Why does it matter?
A purchase Money security interest is made by seller financing goods or finance financing goods, on credit, and then taking a security interest therein.
PMSI in consumer goods perfects automatically.
PMSI in equipment can be perfected (usually by filing) any time
within 20 days after the debtor gets possession of the collateral, and
A PMSI in inventory must be perfected (usually by filing) by the time the debtor gets possession of the collateral—there is no 20-day grace period—and others with a previously filed security interest in the inventory must be given notice
PMSI has Superpriority in certain circumstances (superpriority on another card)
Creation of a Security Interest
Attachment secures the Creditor.
3 requirements for attachment, which must coexist:
* parties must agree to create the Security interest (enter into a security agreement), as evidenced by (1) the creditor taking possession of the collateral, (2) an authenticated security agreement, or (3) the creditor taking control of nonconsumer deposit accounts, electronic chattel paper, or investment property, and
* Value must be given by the secured party, and
* Thedebtor must have rights in the collateral
Tangible Collateral
Consumer goods—goods used or bought primarily for personal, family, or household purposes
* Equipment—goods that are used or bought for use in a business. Note: This is also the default category for goods.
* Farm products— they are in the possession of a debtor engaged in farming operations
* Inventory—goods held for sale or lease,
After Acquired Property
security interest
Without an explicit after-acquired property clause in the security agreement, the secured party’s security interest only reaches collateral that the debtor had rights in at the time the debtor signed the security agreement.
exception: a security interest will attach automatically to collateral of a type that’s rapidly depleted and replenished, such as accounts and inventory.
Perfection
Attachement creates a security interest. Perfection notifies the rest of the world (other creditors) of that interest.
5 methods of perfection:
(1) filing a financial statement;
(2) taking possession of the collateral (Pledge);
(3) control;
(4) automatic perfection (PMSI in consumer goods); and
(5) temporary perfection.
Financial Statement
Perfects a security interest.
The financing statement must contain:
* The debtor’s name and mailing address
* The secured party’s name and mailing address, and
* A description of the collateral covered by the financing statement
A financing statement is valid for 5 years.
Priority of Security Interests
Between two perfected interests: First in Time to file or perfect
Between unperfected interests: first to attach
Unperfected v Perfected: Perfected wins
PMSI Superpriority
superior to prior perfected security interests in the same collateral if certain conditions are met.
PMSI in goods other than inventory and livestock has priority over conflicting security interests in the same goods or their proceeds if the interest is perfected before or within 20 days after the debtor receives possession of the goods.
PMSI in inventory collateral and Livestock has priority over a conflicting security interest in the same inventory or proceeds of the inventory that are chattel paper, instruments, or cash if:
* It is perfected at the time the debtor gets possession of the inventory (filing must take place before the inventory is delivered to the debtor), and
* Any secured party who has filed their security interest in the same inventory receives authenticated notification of the PMSI before the debtor receives possession of the inventory
Authorized v. Unauthorized sale of secured collateral
A buyer of collateral may, or may not, take free of the interest depending on authorization of sale. Authorization may be implied in the case of inventory.
A BOIC will take free of the interest regardless of authorization. If not BOIC, and sale is unauthorized, then buyer takes subject to a perfected interest, but not subject to an unperfected interest unless they have knowledge of the interest (b/c an unperfected interest does not notify the world of the interest)
BIOC
Buyer in the Ordinary Course of Business = one who buys goods
(1) in good faith,
(2) without knowledge that the sale violates the rights of another person in the goods, and
(3) in the ordinary course of business from a seller in the business of selling goods of the kind purchased
Knowing about the existence of the security interest does not equate to knowing the sale violates the interest.
Consumer to Consumer sale of Secured goods
In the case of consumer goods, a buyer takes free of a security interest, even though it’s perfected, if the buyer buys
(1) without knowledge of the security interest,
(2) for value,
(3) for the buyer’s own personal, family, or household purposes, and
(4) before a financing statement covering the goods has been filed.
VA General PJ
Service of Process in VA or Domicile in VA
VA Specific PJ
VA Long Arm §:
- Causes Tortious Injury in Virginia by Act or Omission in Virginia
- Causes Tortious Injury in Virginia by Act or Omission Out of Virginia and defendant regularly does or solicits business in Virginia or (2) engages in any other persistent course of conduct from which it derives substantial revenue from goods used in Virginia.
- Contracts to Supply Services or Things in Virginia
- Relates to Realty in Virginia
- Transacts Any Business in Virginia if the claim arises from just one business contact with the Commonwealth (VA is a “single transaction” state)
- Causing Injury in Virginia by Breach of Warranty Where Sale Was Out of State if the seller could reasonably foresee effect in Virginia and the seller regularly does or solicits business in Virginia or derives substantial revenue from goods consumed in Virginia.
- Domestic Relations Cases
- Nonresident Motorist Act (“NRMA”)
CONSTITUTIONAL REQUIREMENT OF MINIMUM CONTACTS MUST BE MET
“such minimum contacts with the forum so that jurisdiction does not offend traditional notions of fair play and substantial justice”
VA Circuit Court SMJ
can hear any civil action except those for which exclusive jurisdiction is vested in another court. The main exception is for actions for monetary claims or claims to specific personal property of $4,500 or less (GDC)
VA General District Court
No pleadings, dicovery, or juries. Monetary claims only (no injuctions except to enforce the VA FOI Act).
- contract actions or actions in detinue if the amount in controversy is $25,000 or less.
- between $4,500 and $25,000, jurisdiction is concurrent with the circuit court.
- Personal injury not exceeding $50,000.
- attachment cases for personal property if the value is $25,000 or less
- interpleader cases if the real or personal property is worth $25,000 or less
- Distress Claims for any amount (rent due)
- Exclusive Jurisdiction over monetary claims of $4500 or less
VA TRANSFER BETWEEN GDC AND CIRCUIT COURT
A motion to amend a complaint seeking more than GDC jurisdictional amount (or less than Circuit amt), brought within 10 days before trial, the Court will transfer the case rather than dismiss it.
Right to APPEAL FROM GDC TO CIRCUIT COURT
There is an absolute right to appeal a final judgment from GDC to circuit court if the “amount involved” is more than $20. This means a party who is “aggrieved” by more than $20 by the judgment in GDC can appeal to the circuit court.
VA Steps for Appeal from GDC to Circuit Court
(1) the party files written notice of appeal with the clerk of GDC within 10 days of judgment;
(2) the appealing party posts a bond and pays a writ tax in GDC within 30 days of judgment (10 days, however, if it’s an unlawful detainer case).
Circuit Ct reviews De novo b/c GDC is a court not of record (theres no record to review)
VA Venue
Category A Venue:
- Certain Land Actions—“Local Actions”: venue will be where the land is located or any part thereof
- Wills (where it is or couldve been probated)
- Writs ( of mandamus, certiorari, prohibition)
- Injunctions
Category B Venue
* Where the defendant resides or has her principal place of employ- ment; or
* Where the cause of action (or any part thereof) arose
VA Improper Venue
Is not grounds for dismissal. Transfer to proper venue is the remedy unless there is good cause, which means the party seeking transfer did not promptly press the issue
VA Tranfser From Proper Venue
Any party may transfer venue but the Court must find good cause:
relevant to good cause that the court weighs are:
(1) the plaintiff’s choice of forum against things like
(2) agreement of the parties,
(3) the avoidance of substantial inconvenience to parties or witnesses,
(4) any delay in party’s seeking transfer
π choice of forum is given substantial weight
VA Forum Non Conveniens Dismissal
If the
- cause of action accrued out of state and
- brought by a nonresident of Virginia, and
- there is a more convenient venue outside Virginia
Service of Process in VA
Descending Order Rule
(1) Personal (Actual) Service. delivering process directly to the defendant
(2) Substituted Service.
- Service must be at Defendant’s usual abode,
- on a member of Defendant’s family at least age 16, and
- The process server must tell that person the purpose of the documents
(3) Posted Service.
- posting a copy of process on the front door and, 10 days before taking default judgment,
- mailing process and
- certifying to the clerk that the mailing took place
PROCESS MUST BE SERVED ON ∆ WITHIN 1 YEAR OF FILING THE COMPLAINT
VA Curing Statute (Service)
curing statute allows “actual and timely” service even if the service was technically improper. So long as ∆ gets service of process within the allotted time (1 year from filing)
Service on ∆ outside VA
- π executes and files an affidavit setting forth that the defendant is a nonresident or cannot be found with due diligence at the defendant’s last-known address.
- π gives process and a copy of the affidavit to the Secretary of the Commonwealth.
- The Secretary then sends process to the defendant by certified mail.
- Secretary Sends the certificate of mailing to the court.
or
Arrange for out of state service as authorized by that state
Service Under the Nonresident Motorist Act
Serve Commisioner of Motor Vehicles with an affidavit of due diligence and of the ∆’s non-residence
Service by Publication
is sufficient for cases involving property rights (in rem jurisdiction), or regarding marital status
Form of Pleading
All pleadings must state, in numbered paragraphs, the facts on which the party relies.
at least 1 individual lawyer must also be set forth and sign.
Documents that are the basis of a claim or defense may be annexed as an exhibit, which makes them part of the pleading
Circuit court does not require statement of jurisdiction or venue, but a prayer for relief must be included identifying punitive damages separately
Motion Craving Oyer
If granted, requires a party to turn over documents that should have been annexed to the pleading
Attorney Certificate
Analog to FRCP 11
Attorney is certifying that (
1) she has read it; and
2) to the best of her knowledge, information and belief (formed after reasonable inquiry), it is grounded in fact and law (or a good faith claim that the law should be modified); and
3) it is not for harassment or delay.
Extensions to File pleadings in VA
are liberally granted, except for a challenge to venue (which issue must be promptly pressed). Extension for venue may come about ipso facto by an extension to file a responsive pleading.
∆ Response to Pleadings
21 days to answer/motion.
- motion for bill of particulars
- motion objecting to venue (21 days from service, thats it, unless extension to file responsive pleading is granted)
- Motion to dismiss for untimely service (this is a special appearance)
- Challenge to PJ. Must be made before any general appearance (engaging the merits) or PJ is waived. Challenge to PJ and Venue can be simultaneous (but waived if made after venue)
- Motion to quash process (improper service)
- Demurrer (objects to the sufficiency of the pleadings, therefore a general appearance)
- Special Plea or “Plea in Bar of Recovery” (affirmative defenses)
- Answer. (1) responses to allegations of the complaint (admit, deny, state lack of knowledge) in numbered paragraphs and (2) affirmative defenses (special pleas)
A “general denial” is one sentence long; it denies all the allegations of the complaint. Such a denial is generally not allowed by court rule.
After the court has overruled all demurrers, pleas and motions, the defendant will be ordered to file her answer within 21 days or such time as the court directs.
Civil Warrant
Name of pre-printed complaint form for GDC . Non-preprinted is just a summons.
Includes the Return Date, which is the date on which ∆ is to appear in court to respond (which must be within 5-60 days after service)
A responsive pleading is not necessary unless π requests for ∆’s ground of defense (w/in courts discretion).
∆ can also move for Bill of particulars (FRCP motion for more definite statement) seeking more info on π case.
Amending Pleadings
There is never a right to amend. A party must get leave to amend. Amendment will be allowed liberally to further the ends of justice.
Circuit Court Discovery
Similar to FRCP except
- 21 days to respond to requests (30 in FRCP
- No required disclosures
- 30 interogatories allowed (25 in FRCP)
- No limit on depos (10 in FRCP, no more than 2 in a day in FRCP)
Subpoena Duces Tecum
get materials by using a subpoena duces tecum, which is requested in writing from the clerk of the court, with notice to all parties. An attorney also can issue a subpoena or subpoena duces tecum as an officer of the court. She must file a copy of the subpoena with the court and serve a copy on all parties.
VA Counterclaims and crossclaims
Counterclaims:
- Never compulsory.
- Can be for any claim (doesnt have to be transactinally related)
- Must be filed within 21 days of service. π has 21 days to respond to counterclaim.
Crossclaims:
- Mostly same as FRCP (never compulsory, must be transactionally related etc.)
Necessary and Indispensible Parties
- Without the absentee, the court cannot accord complete relief among the existing parties (worried about multiple suits); or
- The absentee’s interest may be harmed if she is not joined; or
- The absentee claims an interest that subjects a party (usually the
defendant) to a risk of multiple obligations.
Joint tortfeasors are never necessary.
An indispensible party is a necessary that cannot be joined for lack of jurisdiction–thus dismissal.
Wrongful Death
Who are the beneficiaries?
* (1) Surviving spouse, children, grandchildren of decedent
* (2) If there are no children or grandchildren, beneficiaries are sur- viving spouse and parents of the decedent
* (3) If there is no surviving spouse, no children, and no grandchil- dren, the beneficiaries are the parents and siblings of the dece- dent.
* If there are no beneficiaries in any of these groups, the damages pass to the decedent’s intestate takers
SOL: 2 years
Partition
- An action for partition of realty can be filed only in the circuit court
- Venue is Category A.
- in Kind
If the court orders partition in kind, the court divides up the property among the various interested persons so each gets some land. Partition in kind is the preferred method. - by Allotment
If the court orders partition by allotment, the court lets one or more of the co-owners have the land and orders them to pay off the others. Before allotment, the court must determine that partition in kind cannot be practicably made. - by Sale
If division in kind and partition by allotment are not feasible, the court orders sale of the land, with the co-owners to split the proceeds. Partition by sale is not favored.
Ejectment
Unlawful Detainer
Ejectment seeks to remove someone who is currently in unlawful possession of property and determine proper title/interests in the real property (Circuit Only)
Detainer seeks to remove a tenant and recover possession for the landlord/owner (GDC or Circuit)
Detinue
Seeks to recover personal property or the value thereof
SOL’s for:
Personal Injury
Nonphysical Personal Torts
Defamation
Property Damage
Property Damage for UCC goods
Fraud
Wrongful Death
Written Contracts
Oral Contracts
Unlawful Detainer
UCC negotiable instrument
Borrowing Statute
Personal Injury - 2 years
Nonphysical Personal Torts - 2 years
Defamation - 1 year
Property Damage - 5 years
Property Damage for UCC goods - 4 yrs
Fraud - 2 yrs
Wrongful Death - 2 yrs (But the claim is barred if decedent was injured more than 2 years before his death and died from those injuries without ever bringing suit)
Written Contracts - 5 yrs
Oral Contracts - 3 yrs
Unlawful Detainer - 3 yrs
UCC negotiable instrument - 6 yrs
Borrowing § says that where the claim is controlled by another state’s law, VA applies the shorter of the two states limitation periods.
Nonsuit
right to do so once without prejudice unless
(1) the jury is retired from bar or
(2) a nonjury case has been submitted to court for decision or
(3) a motion to strike evidence is granted or
(4) a demurrer or special plea is fully argued and awaiting decision.
π can take a nonsuit if mistrial, motion to strike denied etc. so long as one of the above is not occuring
VA Summary Judgement
no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law.
- Evidence for sum judg cannot be based on deposition testimony unless stipulated by parties
- evidence cannot be based on affidavits
- Conflict in pleadings can create a triable issue. No conflict in pleadings then sum judge
Jury Right, Size, Demand,
Voir Dire, and Verdict
Jury right is same as Fed (cases in controversy exceeding $20), party must file in writing within 10 days of the last pleading.
More than $25K - 7 jurors
Less than $25K - 5 jurors
parties consent - 3 jurors
3 peremptory challenges per side
unlimited challenges for cause (“favor”)
Verdict must be unanimous unless stipulated by parties.
Quotient Verdicts are improper, but jurys may only be asked directly about misconduct. Parties must ask for jury poll if damages are suspect
Ore Tenus
Oral Testimony
MOTION TO STRIKE EVIDENCE
JMOL equivalent.
if standard is satisfied, judge;
(1) grants motion to strike evidence and
(2) enters summary judgment.
Motion to Strike evidence is not necessary to seek a motion to set aside verdict as contrary to the evidence (RMJOL equivalent)
GDC rehearing
party must seek rehearing within 30 days of entry of judgement. Court must rule on the motion within 45 days of entry of judgement
Circuit Court post-trial motions
Must be made within 21-days.
During this period, the court can suspend, vacate, or modify the judgment or decree. This 21-day period is called in the breast of the court. – If the court does not suspend, vacate,
or modify a judgment or decree It loses jurisdiction even if there is a motion under advisement.
Motion to Set Aside Verdict as Contrary to Evidence
A motion to set aside verdict as contrary to the evidence is the equivalent of the renewed motion for judgment as a matter of law, but the party making the motion is not required to have moved to strike the evidence first.
Motion for New Trial
motion within 21 days of judgement based on grounds of
1) Prejudicial error or misconduct by court
2) misconduct of party, attorney, of a juror or of a third party;
3) new evidence has been discovered;
4) unfair surprise by evidence presented at trial and the evidence has a material outcome on the trial;
5) excessive or inadequate damages.
Remittitur
and
Additur
Judge may recomend reduction of damages if damages figure shocks the conscience—indicating that the jury was improperly influenced or misconceived the facts or law.
π may:
* Accept the remittitur without protest
* Accept the remittitur under protest and appeal the order to remit OR
* Reject the remittitur and go through the new trial and, if still aggrieved, attempt to appeal on the ground that the grant of new trial was error (preserve the error first though!)
Additur: same standard.
Bill of Review
for equitable causes of action the court has 6 months to review.
a party can file, without leave of court, to correct errors apparent on face of record. With leave of court, a party can file based on new evidence.
VA Appellate Procedure
There is a right to appeal final judgments. If a court order is not a final judgment, it is an “interlocutory” order.
Certification of Interlocutory Ruling
The circuit court may certify a pretrial interlocutory ruling for appeal to the appellate court. A party must request the order and the court must certify:
(1)substantial ground for difference of opinion,
(2) no clear Virginia appellate precedent,
(3) determination of the issue will be dispositive of a material aspect of the case, and
(4) it is in the parties’ best interest to seek interlocutory review.
Within 15 days, the party petitions the court of appeals to hear the matter; the court of appeals has discretion whether to do so.
Appeal of Partial Final Judgment
the loser on the ruling can appeal if:
(1) the trial court enters “partial final judgment” on the claim,
(2) the interests involved are separate and distinct from those remaining,
(3) results of appeal on the partial final judgment will not affect decision in the remaining causes of action, and
(4) results of the remaining issues cannot affect disposition of the cause of action determined in the partial final judgment.
Appeal from Circuit Ct to VA Ct of Appeals
- there is a right to appeal final judgments of the circuit court in civil cases involving $500 or more
- appellant must file a notice of appeal with the clerk of the circuit court no later than 30 days after entry
of judgment. - appellant files a copy of the notice with the court of appeals. A filing fee must be paid within 10 days after that notice.
- clerk of the trial court prepares the record on appeal and sends it to the court of appeals. the court sends a notice of filing of the record to all parties.
- appellant must file its opening brief within 40 days of that filing.
- appellee’s reply brief is due 30 days after the opening brief. The appellee’s brief can make additional assignments of error.
- appellant may file a reply 14 days thereafter.
- The opening brief must contain:
- (1) a statement of the nature of the case and proceedings at the circuit court and
- (2) assignments of error with references to the record where the error was preserved.
oral argument will be permitted unless the court of appeals unanimously agrees that oral argument is unneces- sary, either because the appeal is without merit or because clear precedent exists and the appellant has not argued that it should be reversed.
Choice of Law regarding Claim and issue preclusion (res judicata and collateral estoppel)
The court in Case 2 applies the law of the court in Case 1.
Res Judicata
Claim preclusion will apply when:
- Case 1 and Case 2 were brought by the same claimant against the same defendant. (Same as under federal law)
- Case 1 ended in a valid final judgment or decree on the merits. Any judgment is on the merits unless it was based on jurisdic- tion, venue, or indispensable parties.
- Case 1 and Case 2 involved assertion of the same cause of action.
If the claimant won Case 1, claim preclusion (res judicata) is called merger. If the claimant lost Case 1, it’s called barred.
Collateral Estoppel
Issue Preclusion will apply when:
- Case 1 ended in a valid final judgment on the merits. Same as federal law.
- An issue presented in Case 2 was actually litigated and determined in Case 1. Same as federal law.
- That issue was essential to the judgment in Case 1. Same as federal law.
- Issue preclusion may be asserted only against one who was a party to Case 1 (or represented by that party). Same as federal law.
- the Virginia Supreme Court has never allowed nonmutual issue preclusion (assertion of issue preclusion of a party who was not involved in case 1)
Pendente lite
during the litigation;
for example, “P had custody of the property pendente lite.” (That means P had posses- sion of the property while the litigation was going on.)
Motion in limine
A pretrial motion outside of the jury’s presence usually to determine the admissibility of evidence
Subpoena duces tecum
Commanding person to produce documents or things
Maker and payee
the person who promises to pay a note (also called the “promisor” or “obligor”)
and
the person entitled to payment on a note (also called the “promisee”)
Draft
Drawer
Drawee
Payee
Draft is an order to pay (check)
* The drawer—the person ordering payment,
* The drawee—the person to make the payment (in a check con- text, also called the payor bank), and
* The payee—the person to receive the payment
Creation of a Negotiable Instrument
- Writing
- Unconditional (not “subject to” or “governed by)
- Signed
- Sum Certain
- Order of Bearer Language
- Promise or Order to pay in Money
- Payable on Demand or at a Definite time
Holder
v.
Holder in Due Course
Holder is a person in possession of an instrument with a right to enforce it. They have:
* Possession of the negotiable instrument and
* Good title, which depends on the words of negotiability used (order or bearer language)
Basic contract defenses are available against a holder
HDC takes free of personal defenses and has rights better than the transferor
Holder becomes HDC when they take for value, in good faith, and without notice.
- Value does not have to be face value of the instrument, and can be just about anything of value
- Good faith is honesty in fact and Observance of reasonable commercial standards (subjective and objective standards)
- Without notice that the instrument is overdue, dishonored, unauthorized signature/forged, other claims/defenses.
Real defenses that will operate against HDC = Forgery, Fraud, Alteration,
Adjudicated incompetency; Infancy, Illegality, Duress, Discharge (by insolvency proceedings; Statute of limitations, and Suretyship.
Endorsements
- Blank indorsement is a signature that isn’t accompanied by the naming of a specific indorsee.
- special indorsement is accomplished by the payee’s signature plus a designation of a new person to whom the instrument is payable.
- Qualified Indorsement is an indorsement with the words “without recourse” and limits the contract liability imposed on indorsers
- Restrictive Endorsement Any other language added to an indorsement creates a restrictive indorsement. but they are ineffective to limit transfer or negotiation or to condition payment. e.g. “for deposit” the money must be deposited only
Shelter Rule
Where an HDC or BFP transfers to a non HDC/BFP, the transferee will have the same protections/priorities as the HDC/BFP transferor.
an attempt to fraudulenty clear title through the shelter rule will fail.
Contract Liability of Negotiable Instruments
The primary basis of contract liability on an instrument is a person’s signature.
- Maker of a Note has primary liability to the holder of the note. Thus, the maker must pay the instrument when it is due according to its terms (unless K defenses)
- Drawer of a Draft has secondary liability. Holder must first present draft to drawee (bank, which never has duty to pay) and if the drawee dishonors the draft, then Drawer is liable for payment upon notice of dishonor (barring K defenses)
- Indorsers are liable to each other in order of signatures
Warranty Liability of Negotiable Instruments
implied warranties arise automatically when an instrument is transferred or presented. possession of the instrument isn’t necessary to enforce warranties
Transfer Warranty arises when transferor recieves consideration
- Transferor is entitled to enforce the instrument.
- All signatures are authentic and authorized
- The instrument or item has not been altered
- No defense or claim of any party is good against the transferor
- Transferor has no knowledge of any insolvency proceedings
Presentment Warranty: presenter warrant that:
- Entitlement to enforce
- No knowledge that drawer’s signature is unauthorized
- No alteration
Claim baed on WARRANTY VS. INDORSER’S CONTRACT
If the payor hasn’t paid the instrument, such as when a check bounces or a promissory note isn’t paid by the maker, then the holder will sue the indorser on the indorser’s contract.
If the payor has paid and later discovers the payor shouldn’t have paid because, for example, the check was forged or the note was altered, the payor will attempt to sue the indorser for breach of warranty (transfer or presentment, as appropriate under the facts).
Promoters and Subscribers
Promoter: a person who acts on behalf of a corporation net yet formed.
Subscribers are persons or entities who make written offers to buy stock from a corporation not yet formed. (in VA, preincorporation offer to buy stock is irrevocable for 6 months)
When does a corporation become liable on a preincorporation K?
Promoter Liability?
Under a promoter’s preincorporation contract a corp is liable when it adopts a promoters preincorporation contract, either by express board resolution, or implied ratification by knowledge and acceptance of benefits.
promoter will remain liable until novation occurs. ie., a brand new agreement absolves the promoter from liability–that the corporation will replace the promoter under the contract.
Duties of Promoter and Liability for promoter’s undisclosed profits, and recovery thereof
promoters are fiduciaries and owe a duty of loyalty to the corp. (no secret profits, usurping opporunities, self-dealing)
A promoter who profits on the sale of property to the corporation may be liable to the corporation for the profits, or may be forced to rescind the sale, unless:
- They disclose all material facts to an independent board of directors that adopts the transaction;
- The transaction, if fully disclosed, is adopted by all current shareholders, or
- The promoter is the sole shareholder at the time of the sale to the corporation and there is no plan to sell stock to other individuals.
Profits that May Be Recovered
- If the promoter acquires property before becoming a promoter and sells to a corporation at a profit, the profit is recoverable only if it is sold for more than fair market value.
- If the promoter acquires property after becoming a promoter and sells to a corporation at a profit, any profit is recoverable by the corpora- tion.
Corporation Formation Requirements
Incorporator signs and files articles of incorporation with the SCC (A-PAIN). Articles include
- Authorized Shares
- Preferences of classes of shares
- Registered Agent
- Incorporator (name/address)
- Name of Corporation
Corp must adopt by-laws but they do not need to be included into Articles of Incorporation
PIERCING THE CORPORATE VEIL
Courts will hold shareholder(s) personally liable if
- an owner/shareholder is treating the corp as an alter ego (treating the assets of the corporation as their own, using corporate funds to pay private debts, failing to keep separate books, failing to hold required meetings, and so on)
- the corp is Undercapitalized and cannot cover foreseeable liabilities
- If shareholders are misusing corporate form to avoid existing personal obligations, perpe- trate a fraud or crime, commit injustice, or gain an unfair advantage.
