CHAPTER 25 CREATING A NEGOTIABLE INSTRUMENT

593 - 612 Commercial Paper

Commercial paper is a contract to pay money.Used as:

A substitute for money (must be payable on demand)A loan of money (contract to pay what is owed sometime in the future)

Promissory note - a written promise to pay moneyUCC Article 3 - regulates commercial paper

Fundamental "rule" of commercial paper:The possessor of a piece of commercial paper has an unconditional right to be paid, so long as

1. The paper is negotiable2. It has been negotiated to the possessor3. The possessor is a holder in due course, and4. The issuer cannot claim any of a limited number of "real" defenses

Types of negotiable instrumentsTwo kinds of commercial paper: negotiable and non-negotiable instrumentsArticle 3 covers only negotiable (non-negotiable instruments are governed by ordinary contract law)2 categories of negotiable

Notes and draftsA note is a promise to do something while a draft is an order to someone else to do itNote (aka promissory note)

Your promise you'll pay the moneyUsed in virtually every loan transactionMaker - the issuer of a promissory notePayee - someone who is owed money under the terms of an instrumentPayable on demand - the maker must pay whenever he is askedCertificate of deposit - a note that is made by a bank (aka CD)

Draft An order directing someone else to pay money for youCheck - most common form of draft; an order telling a bank to pay moneyDrawer - person who issues a draftDrawee - one ordered by the drawer to pay money to the payeeIssuer - the maker of a promissory note or the drawer of a draft

Cashier's check - one that is drawn by a bank on itselfAll checks are drafts, but not all drafts are checksDraft is a check only if its drawn on a bankAccept - to sign a draftTrade acceptance - a draft drawn by a seller of goods on the buyer and payable to the seller or some third party

Slight draft - payable on demandTime draft - payable in the future

NegotiabilityTo work as a substitute for money, commercial paper must be freely transferable in the marketplace - it must be negotiablePossessor of non-negotiable commercial papers has the same rights as the person who made the original contract

With non-negotiable commercial paper, the transferee's rights are conditional because they depend upon the rights of the original party to the contract - the transferee cannot be absolutely sure what his rights are or whether he will be paid at all

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Possessor of negotiable commercial paper has more rights than the person who made the original contract.Transferee's rights are unconditional and generally do not depend upon the rights of the original party to the contract. (Must pay the full amount even if there is an issue, but can subtract from what one owes any claims against him for breach of contract because, as the original party to the note, he cannot be a holder in due course)

Requirements for negotiabilityAn instrument is indeed negotiable if it meets the following 6 standards:

1. The instrument must be in writing. 2. The instrument must be signed by the Maker or Drawer. (any signature counts, initials, an "x", a

stamp, as long as the issuer intends to indicate her signature)3. Must contain an unconditional promise or order to pay 4. Must state a definite amount of money5. Must be payable on demand or at a definite time6. Must be payable to order or to bearer

Order paper - an instrument that includes the words "pay to the order of" or their equivalentBearer paper - a note is bearer paper if its made out to "bearer" or it is not made out to any specific person; can be redeemed by any holder in due course

Interpretation of ambiguitiesUCC favors negotiabilityWhen the terms in a negotiable instrument contradict each other, these rules apply:

Words take precedence over numbersHandwritten terms prevail over typed and printed termsTyped terms win over printed terms

Judgment rate - the interest rate that courts use on court-ordered judgmentsBlasco v. Money Services Center

FactsBlasco borrowed $500 from Money Services Center; payday loan; was going to repay $587.50 (17.5 interest)Before MSC could cash the check, Blasco filed for bankruptcy protection; MSC knew and still deposited the check (illegal for creditors to collect debts after bankruptcy filing, except are entitled to payment on negotiable instrumentsUsually checks are negotiable instruments, but only if there are for a definite amountThe check:

Numerical amount "$587.50"Words: "five eighty-seven and 50/100 dollars"

You be the judge: Was this check a negotiable instrument? Was it for a definite amount?Argument for Blasco:

For a check to be negotiable must:State a definite amount of money, which is clear within its four cornersIf a contradiction between the words and numbers, words take precedence over numbers

Words prevail over numbers, so amount is not definiteHolder can't be sure of precise amount - not a negotible instrument and MSC has no right to submit it for payment

Argument for MSC:Blasco is right about words, but wrong about interpretationThere was no contradiction, only ambiguity

NegotiationThe possessor of a piece of commercial paper has an unconditional right to be paid, as long as

1. The paper is negotiable2. Has been negotiated to the possessor3. The possessor is a holder in due course

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4. The issuer cannot claim any of a limited number of real defensesNegotiation means that an instrument has been transferred to the holder by someone other than the issuer.

If the issuer has transferred the instrument to the holder, then it hasn't been negotiated and the issuer can refuse to pay the holder if there was some flaw in the underlying contract

To be negotiable, an instrument must be Order paper (payable to the order of someone)

To be negotiated: Must first be indorsed and then delivered to the transfereeOr bearer paper (payable to anyone in possession)

Ex: Note made out to cashTo be negotiated: simply be delivered to the transferee

Indorsement - the signature of a paper/signature of the payee3 types:

1. Blank indorsement - when you sign the check on the back without designating any particular payee; turns the check into bearer paper

2. Special indorsement - limits an instrument to one particular person 3. Restrictive indorsement - limits the check to one particular use

Ex: writing for deposit only on the back of a checkHolder in due course

A holder in due course has an automatic right to receive payment for a negotiable instrument (unless the issuer can claim a limited number of real defenses). If the possessor of an instrument is not a holder in due course, then his right to payment depends upon the relationship between the issuer and payee.

Holder in due course status increases the value of an instrument because it enhances the probability of being paid

Requirements for being a holder in due courseHolder in due course - holder who has given value for the instrument, in good faith, without notice of outstanding claims or other defects

HolderFor order paper: anyone in possession of the instrument if it's payable to or indorsed to herFor bearer paper: anyone in possession

ValueValue - the holder has already done something in exchange for the instrumentA holder in due course must give value for an instrumentA promise to do something in the future is a consideration under contract law, but such a promise does not count as value under Article 3If the holder receives an instrument in return for a promise, he does not deserve to be paid unless he performs the promise; but if he were a holder in due course, he would be entitled to payment whether he performed or not

Good faith2 tests to determine if a holder acquired an instrument in good faith; must meet both tests:

Subjective test: did the holder believe the transaction was honest in fact?Objective: did the transaction appear to be commercially reasonable?

Buckeye Check Cashing, Inc. v. CampFacts

October 12, James Camp agreed to provide services to Shawn Sheth by October 15; Sheth gave Camp a check for $1300 postdated October 15On October 13, Camp sold the check to Buckeye for $1261.31. October 14, Sheth stopped payment on the check, fearing Camp would violate; also Buckeye deposited the check but didn't know of the stop payment order Trial court: Buckeye was a holder in due course, the check was valid and Sheth had to pay Buckeye; Sheth appealed

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Issues: Was Buckeye a holder in due course? Must Sheth pay Buckeye?Judge:

Honesty in fact - the absence of bad faith or dishonesty with respect to a party's conduct within a commercial transactionState of Ohio require objective test "the observance of reasonable commercial standards of fair dealing"; check cashing is an unlicensed and unregulated business in Ohio - no concrete commercial standards by which most operatePresentation of a post-dated check should put the cash-checking industry on notice the check might not be goodJudgment reverse, and cause remanded

Notice of outstanding claims or other defectsIn certain circumstances, a holder is on notice that an instrument has an outstanding claim or other defect

1. The instrument is overdue. (it's overdue the day after its due date; however not overdue if simply the interest is unpaid); any other demand instrument is overdue (1) the day after a request for payment is made or (2) a reasonable time after the instrument was issued

2. The instrument is dishonored (to refuse to pay it)3. The instrument is altered, forged, or incomplete 4. The holder has notice of certain claims or disputes

No one can qualify as a holder in due course if she is on notice that (1) someone else has a claim to the instrument or (2) there is a dispute between the original parties to the instrument.

Holder in due course status is determined when the holder receives the instrument

Hartford Accident & Indemnity Co. v. American Express, Co.Facts:

Stratford Skalkos, manager of import/export department at Avon Products, stole $162,538.65 by altering the names of the payees (had authority to requisition checks up to $25,000) so they sounded like company namesWas really paying his own billsAvon sued the recipients of the checks, demanding the funds be returnedTrial Court: defendants were entitled to keep money because they were holders in due course and thus took the checks free of any claims or defenses; Avon appealed

Issue: Were the defendants holders in due course?Judge:

To be a holder in due course a party must take the instrument "without notice that it's overdue or has been dishonored or of any defense against a claim to it on the part of any person"Avon: defendants took the checks from Skalkos with notice of Avon's claim (Avon had not authorized defendants to apply its funds to Skalko's personal indebtedness)Minor errors or misspellings were not irregularities of such magnitude as to put a holder on notice that something was wrongDefendants indicated they regularly receive payment through corporate accounts for goods or services furnished to individualsParties who take commercial paper for value are not bound at their peril to be upon the alert for circumstances which might possibly excite the suspicions of wary vigilanceDefendants did not have notice of Avon's claim under UCC section 3-304Avon was the party best able to prevent the loses and to protect itself by insuranceOrder of appellate division: dismissing the complaint - affirmed, with costs

Shelter Rule

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Under the shelter rule, the transferor of an instrument passes on all of his rights. When a holder in due course transfers an instrument, the recipient acquires all the same rights even if she is not a holder in due course herself.One exception: if a holder in due course transfers the instrument back to a prior holder who was a party to fraud involving the instrument, that prior holder does not acquire the rights of a holder in due course

Defenses against a holder in due courseReal and personal defenses are valid against an ordinary holder; only real defenses can be used against a holder in due course

Real defensesValid against both a holder and a holder in due course

ForgeryBankruptcy Being underage Alteration

If the amount of an instrument is wrongfully changed, the holder in due course can collect only the original (contract) amountIf the instrument was incomplete, the holder in due course can collect the full face amount, even if the instrument was incorrectly filled in

Duress, mental incapacity, or illegalityFraud in the execution

Issuer has been tricked into signing without knowing what the instrument is and without any reasonable way to find out

Personal defensesValid against a holder, but not against a holder in due courseTypically have some connection to the initial transaction in which the instrument was issued

Breach of contract Lack of considerationPrior paymentUnauthorized completionFraud in the inducement

Note: fraud in the execution (real defense) has a different result from fraud in the inducement (personal defense)

Non-deliveryClaims in recoupment

The issuer subtracts (i.e., sets off) any other claims he has against the initial payee from the amount he owes on the instrument~I'm not going to pay the full amount of the instrument because she owes me money for something else(defense - I'm not going to pay the full amount of the instrument because there is some problem with the instrument itself or the underlying deal on which the instrument is basedA claim in recoupment is valid against a holder but not against a holder in due course

Consumer exceptionConsumer credit contract - one in which a consumer borrows money from a lender to purchase goods and services from a seller who is affiliated with the lenderFTC requires all promisory notes in consumer credit contracts to contain:

Notice. Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained with the proceeds hereof.

Under the UCC, no one can be a holder in due course of an instrument with this languageAntuna v. Nescor, Inc.

Facts:

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Steven Vlohotis, a salesman for NESCOR - a home improvement company - convinced the Antunas to sign a consumer credit contract with them to install vinyl siding and windowsContract - Antunas would pay for the improvements in installments NESCOR assigned contract to First Consumer Credit, who reassigned to The Money Store (TMS)Had the FTC languageConnecticut - "no home improvement contract shall be valid or enforceable against an owner unless it's entered into by a registered salesman or a registered contractor; Vlohotis was not registeredAntunas unhappy with work, so stopped making payments, TMS filed suitAntunas moves for summary judgment, you're not a holder in due course

Issues: Does TMS have the right to foreclose on the Antunas' home? Was TMS a holder in due course?Judge:

NESCOR noncompliance renders the home improvement contract invalid and unenforceable and precludes it from enforcing the consumer credit contract against the plaintiffs

 

CHAPTER 26 LIABILITY FOR NEGOTIABLE INSTRUMENTS Introduction

The issuer of a negotiable instrument is liable to a holder in due course, unless the issuer can assert one of a limited number of real defensesAn issuer can assert both personal and real defenses against a mere holderSignature liability - liability of someone who signs an instrumentWarranty liability - liability of someone who receives payment on an instrument

The contract versus the instrumentInstruments create a second contract to pay the debt created by the first agreementOnce an instrument has been accepted in payment for a debt, the debt is suspended until the instrument is paid or dishonored

Enforcing an instrument(Instrument --Negotiated--> Holder ---Claim for Payment -->

--> No Defense ---> PaymentOr

--> Defenses --> No PaymentA holder is someone in possession of an instrument that has been validly negotiatedReal and personal defenses can be used against a holderWho has the right to demand payment on an instrument? A holder against whom no defenses can be used.

Primary versus secondary liabilityPrimary liability - unconditional liability - must pay unless he has a valid defenseSecondary liability - must pay only if the person with primary liability does notHolder of an instrument must first ask for payment from those who are primarily liable before making demand against anyone who is only secondarily liable

The payment processComprises as many as 3 steps:Presentment

Means the holder of the instrument demands payment from someone who is obligated to pay it (such as the maker or drawee)To present, the holder must

1. Exhibit the instrument2. Show ID3. Surrender the instrument (if paid in full) or give a receipt (if only partially paid)

DishonorInstrument is past due, but the maker (of a note) or the drawee (of a draft) refuses to pay

Notice of dishonor

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Holder of the instrument notifies those who are secondarily liable that the instrument has been dishonoredCan be given by any reasonable means, including oral, written, or electronic communicationMust be giving with 30 days of the dishonor (except in the case of banks, which must give notice by midnight of the next banking day)Must simply identify the instrument and indicate that it has been dishonored

Signature LiabilityLiability depends upon the capacity in which it was signed; different for maker, indorser, guarantor, etc.Location on check, assume:

Issuer - lower right-hand corner Acceptor - signs on face of checkIndorser - signs the back of an instrument

MakerMaker - the issuer of a notePrimarily liableMust pay unless he has a valid defenseIf two makers sign a note, they are jointly and severally liableHolder can demand full payment from either or partial payment from both

DrawerMost common form of draft - a checkDrawer - person who writes the checkHas secondary liabilityNot liable until he has received notice that the bank has dishonored the check

DraweeDrawee - bank on which a check is drawnThe bank is not liable to the holder and owes no damages to the holder for refusing to pay the check.

Bank must be liable to the drawer for violating their checking account agreement, but this contract doesn't extend to the holder of the check.

When a holder presents a check, the bank can do one of the following:Pay the check - the holder has no complaintsDishonor the check - the holder must pursue remedies against the drawer

Certified check - a check that the issuer's bank has signed, indicating its acceptance of the checkBank then becomes primarily liable

Cashier's check - drawn on the bank itself and is a promise that the bank will pay out of its own fundsHarrington v. MacNab

FactsMacNabs purchased property from Harrington's clientMacNabs had a personal check for $150,128.70; not certifiedHarrington called Merrill Lynch and was told there were sufficient funds in the account and that she would put a hold on the account in the amount of the checkTo confirm the promise in writing, Merrill Lynch faxed "This letter is to verify that the funds are available in the Merrill Lynch account. There is a pend on the funds for the check that was given you."MacNab's account did not contain sufficient cleared funds to cover check; MacNab's kept promising but never made good; Harrington paid his clients the amount owed and then sued MacNab's; sought recovery from Merrill Lynch

Issue: Is Merrill Lynch liable to Harrington as the drawee of the check?Judge:

No contractual privity or its equivalent between Mr. Harrington and Merrill Lynch, which was in a position equivalent to that of the drawee on the MacNab's checkTo hold that an "intimate nexus" relationship existed in this case would lead to the result that any payee on a check who makes inquiry is in the equivalent of contractual privity with the drawee, a

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proposition that would place substantial and potentially unlimited liability on drawees for uncertified checks, in contravention of the basic policies underlying the checking system in the USA drawee has no contract liability on a check to a payee unless and until it has accepted the check, viz, certified itGranted Merrill Lynch motion for summary judgment

IndorserIndorser - anyone, other than an issuer or acceptor, who signs an instrumentIndorsers are secondarily liable; must pay if the issuer does not; only liable to those who come after them in the chain of ownership, not to those who held the instrument beforehand

Exceptions; indorsers are not liable if:1. They write the words "without recourse" next to their signature on the instrument"2. A bank certifies the check3. The check is presented for payment more than 30 days after the indorsement, or 4. The check is dishonored and the indorser is not notified within 30 days

Accommodation partyAccommodation party - someone, other than the issuer, acceptor, or indorser - who adds her signature to an instrument for the purpose of being liable on itTypically receives no direct benefit from the instrument but is acting for the benefit of the accommodated partyAccommodated party - someone who receives a benefit from an accommodation partyAccommodation party can sign for an issuer, acceptor, or indorser; anyone who signs an instrument is deemed to be an accommodation party unless it is clear that he is an issuer, acceptor, or indorserAn accommodation party has the same liability to the holder as the person for whom he signed; holder can make a claim directly against the accommodation party without first demanding payment from the accommodated partyAccommodation party is liable only to the holder, not to the other maker

In Re CouchotFacts:

Kathy J. Couchot and her mother-in-law Jean Couchot, borrowed $6,317.8 from Star Bank to pay for her husband's funeralJean executed a note and Kathy signed as an accommodation partyStar Bank issued a check payable to Kathy and Jean Couchot; somehow was altered to read Kathy or Jean CouchotJean cashed the check and use the money to pay funeral expenses and some of Kathy's back taxes and insurance premiumsJean didn't repay the loan to the bankKathy made 6 payments before defaulting

Issue: Is an accommodation party liable for the full amount of a note when she received only a small portion of the proceeds? Is an accommodation party liable even though the check was altered?Judge:

Consideration doesn't have to be received by an accommodation party to support her obligation While the check was materially altered, there is absolutely no evidence that the check was fraudulently alteredOrdered to pay the note

AgentTo avoid personal liability when signing an instrument, an agent must (1) indicate that she is signing as an agent and (2) give the name of the principalAn agent who fails follow these two steps will be personally liable on the instrument to any holder in the due course who did not know the agent was acting for someone else

Will not be liable to holders who are not in due course if she can prove that the original parties did not intend for her to be liable

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The principal is liable if the agent signs correctly, the agent signs just her own name, or the agent signs only the name of the principalAn agent is authorized to sign a check on the principal's bank account, the agent is not personally liable even if she forgets to indicate that she is simply an agent

Warranty LiabilityApply when someone receives payment on an instrument that is invalid because it has been forged, altered, or stolen

Basic rules of warranty liability1. The wrongdoer is always liable (If a forger signs someone else's name to an instrument, that signature

counts as the forger's , not as that of the person who name she signed. The forger is liable for the value of the instrument plus any other expenses or lost interest that subsequent parties may experience because of the forgery

2. The drawee bank is liable if it pays a check on which the drawer's name if forged. The bank can recover from the payee only if the payee had reason to suspect the forgery.

3. In any other case of wrongdoing, a person who first acquires an instrument from a wrongdoer is ultimately liable to anyone else who pays value for it. (Rules are based on the provisions in Article 3 of the UCC)

Transfer WarrantiesWhen someone transfers an instrument, she warrants that:

She is a holder of the instrument (in other words, she is a legitimate owner)All signatures are authentic and authorizedThe instrument has not been alteredNo defense can be asserted against herAs far as we know, the issuer is solvent

When someone violates the transfer warranties, she is liable for the value of the instrument, plus expenses and interestTransfer warranties flow to all subsequent holders in good faith who have indorsed the instrumentIf the instrument is bearer paper, the transfer warranties extend only to the first transferee. If a warranty claim is not made within 30 days of discovering the breach, damages are reduced by the amount of harm that the delay caused.Transfer warranties apply only if the instrument has been transferred for consideration.

Quimby v. Bank of AmericaFacts:

Steve Szabo, Venezuelan resident, had a checking account with BofA in FloridaSomeone in Nigeria hacked into his online account, called the bank's customer service department, changed the telephone number listed on the account, and order blank checksSomeone wrote a check from Szabo's account for $120,000 to pay for an investment in Freddie Quimby's gold mineOn February 20, Quimby presented the check for payment at BofA branch in Idaho; had branch manager verify through BofA records that Szabo's account had sufficient funds to cover; called the number listed to verify the check was validQuimby indorsed check to the bank and received a cashier's checkFake Szabo said he changed his mind about the investment and wanted money back; February 22, Quimby wired $111,000 from his account to one in Hong Kong; funds disappeared and BofA has been unable to reclaim themMarch 3, real Szabo reported to the bank that his signature on the Quimby check was a forgery; bank repaid Szabo and then filed suit against Quimby, seeking repayment on the cashier's check it had issue to him, with interestBank argued that Quimby had violated his transfer warranties when he indorsed the forged check to it

Issue: Did Quimby violate his transfer warranties? Is he liable to the BofA for $120,000Argument for Bank:

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When Quimby indorsed the check to the bank, he warranted that all signatures were authentic and authorized; not true as signature was a forgery and check was invalid - waited only two days before wiring the funds; if he had waited longer, the fraud might have been discovered in time

Argument for QuimbyBank (1) permitted a thief to hack into Szabo's account; (2) issued blank checks to the thief; (3) assured Quimby that there were good funds to pay the check; (4) issued a cashier's check to Quimby; and (5) wired funds to Hong Kong that it cannot traceBank was negligent

Comparison of signature liability and transfer warrantiesTransfer warranties fill in holes left by the signature liability rules:

A forged signature is invalid and therefore creates no signature liability on the party of the person whose name was signed; however, someone who receives a forged instrument may recover under transfer warranty rules, which provide that anyone who transfers a forged instrument is liable for itThe signature liability rules do not apply to the transfer of bearer paper. Bearer paper can be negotiated simply by delivery; no indorsement is required. No signature means no signature liability (for anyone other than the issuer - who is the only person actually signing the instrument). Transfer warranties apply to each transfer of bearer paper (although the transferor of bearer paper is liable only to the person to whom he gives the instrument, not to any transferees further down the lineUnder the signature liability rules, the holder of an instrument cannot make a claim until the indorser or drawer has been notified that the instrument was presented and dishonored. Under the transfer warranty rules, the holder need not wait for presentment or dishonor before making a claim against the transferor.

Presentment warrantiesPresentment warranties - apply to someone who demands payment for an instrument from the maker, drawee, or anyone else liable on itApply when the instrument returns to the maker or drawee for paymentAnyone who presents a check for payment warrants that; if any of these promises is untrue, the bank has a right to demand a refund from the presenter:

She is a holderThe check has not been altered, andShe has not reason to believe the drawer's signature is forged

Anyone who presents a promissory note for payment makes only one warranty - that he is a holder of the instrumentThe presenter of a note warrants that he is a holderA forged signature prevents subsequent owners from being a holder, so anyone who presents a note with a forged signature is violating the presentment warranties

Other liability rulesConversion liability

Conversion (1) someone has stolen an instrument or (2) a bank has paid a check that has a forged indorsement

Rightful owner of the instrument can recover from either the thief or the bankImposter rule

If someone issues an instrument to an imposter, then any indorsement in the name of the payee is valid as long as the person (a bank, say) who pays the instrument does not know of the fraud

Fictitious payee ruleIf someone issues a instrument to a person who does not exist, then any indorsement in the name of the payee is valid as long as the person (a bank, say) who pays the instrument does not know of the fraud.Imposter rule applies if you give a check with a real name to the wrong personFictitious payee rule applies if you write a check to someone who does not exist

Employee indorsement rule

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If an employee with responsibility for issuing instruments forges a check or other instrument, then any indorsement in the name of the payee, or a similar name, is valid as long as the person (a bank, say) who pays the instrument does not know of the fraudSingle forgery - the employee writes a check to himself, signs his employer's name, and cashes the checkIn a double forgery, the employee writes a check to someone else, forges his employer's name, and also forges the name of the payee

NegligenceAnyone who behaves negligently in creating or paying an unauthorized instrument is liable to an innocent third party; if two people are negligent, they share the loss according to their negligence

Anyone who is careless in paying an unauthorized instrument is liable, despite the three rulesAnyone who is careless in allowing a forged or altered instrument to be created is also liable, whether or not he has violated one of the three rules

Gulf States Section, PGA, Inc. v. Whitney National Bank of New OrleansFacts

Robert Brown, executive director of Gulf States Section of the PGA, was responsible for paying bills and handling the bank account; used Quicken, software program, checks were kept in a box beneath the printer stand in his officeAdrenetti Collins was a secretary; forged 18 checks totaling $22,699.81; intercepted two of the bank statements sent by the Bank and replaced them with forged statements that left out the checks she had stolenThe usual Whitney statement was on vanilla-colored paper measuring a non-standard 6 3/4 x 11 inches; forged documents were on standard 8.5 x 11 white paperCollins asked for a leave of absenceWhitney policy was to verify signatures on check equal to or greater than $5000; one check was for $5000 but was not verifiedBrown's signature was a letter or two and loop

Issue: Is Whitney liable to the PGA for the forged checks it paid?Argument for PGA:

Brown's signature did not appear on these checks, so only the bank is liable on themBrown traveled extensively and wasn't available to supervise the office staff carefully - all companies do thisWhitney admits to not verifying the checks $5000 and over

Argument for Whitney:Banks are liable unless it can show that (1) customer was negligent; (2) the negligence substantially contributed to the forgery; (3) the bank paid the forged instruments in accordance with reasonable commercial banking industry standardsPGA was clearly negligent; checks should have been locked up, not sitting under the printer in an open boxForged signature was close enough to the sloppy original

CrimesBouncing a check

Illegal to write a check on an account that has insufficient fundsCheck kiting

Moving funds between bank account to take advantage of the floatForgery

Utter - to pass on an instrument that one knows to be forgedDischarge

Discharge of the obligorDischarge - liability on an instrument terminatesArticle 3 established 5 ways to discharge an instrument

By payment

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As long as the payment is from someone obliged to pay and goes to the holderBy agreement

Can agree to discharge, even if the instrument is not paid; must be in writingBy cancellation

The intentional, voluntary surrender, destruction, or disfigurement of an instrumentBy certification

When a bank certifies or accepts a check, the drawer and all indorsers of the check are discharged, and only the bank is liable

By alterationIf terms are intentionally changed

No discharge is effective against a holder in due course who acquires the instrument without knowledge of the discharge

Discharge of an indorser of accommodation partyArticle 3 provides that virtually any change in an instrument that harms an indorser or accommodation party also discharges them unless they consent to the change.

Chapter ConclusionIt is never wise to pay an important game without understanding the rules

CHAPTER 24 SECURED TRANSACTIONS

558 - 587 Article 9: Terms and Scope

Article 9 of the UCC governs secured transactions in personal propertyArticle 9 Vocabulary

Fixtures - goods that have become attached to real estateSecurity interest - an interest in personal property or fixtures that secures the performance of some obligationSecured party - the person or company that holds the security interestCollateral is the property subject to a security interestDebtor- a person who has some original ownership interest in the collateral; Having a security interest in the collateral does not make one a debtor. Obligor - a person who must repay money, or perform some other taskSecurity agreement - the contract in which the debtor gives a security interest to the secured party; protects the secured party’s rights in the collateralDefault - occurs when the debtor fails to pay money that is due; also includes other failures by the debtor,such as failing to keep the collateral insuredRepossession occurs when the secured party takes back collateral because thedebtor has defaulted. Typically, the secured party will demand that the debtordeliver the collateral; if the debtor fails to do so, the secured party may find thecollateral and take it.Repossession - occurs when the secured party takes back collateral because the debtor has defaulted. • Perfection - a series of steps the secured party must take to protect its rights in the collateral against people other than the debtor. This is important because if the debtor cannot pay his debts, several creditors may attempt to seize the collateral, butonly one may actually obtain it. To perfect its rights in the collateral, the secured party will typically file specific papers with a state agency.Financing statement -a document that the secured party files to give the general public notice that it has a secured interest in the collateral

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Record - information written on paper or stored in an electronic or other medium.Authenticate - to sign a document or to use any symbol or encryption method that identifies the person and clearly indicates she is adopting the record as her own

Scope of Article 9Applies to any transaction intended to create a security interest in personal property or fixtures

Types of CollateralInstruments - Drafts, checks, certificates of deposit, and notes may all be used ascollateral, as may stocks, bonds, and other securitiesInvestment property - refers primarily to securities and related rights.Documents of title -papers used by an owner of goods who ships or stores them. The documents are the owner’s proof that he owns goods no longer in his possessionAccount - a right to receive payment for goods sold or leasedDeposit accounts - security interests in deposit accounts (money placed in banks)Commercial tort claims - An organization that has filed a tort suit may use its claim ascollateral. Personal injuries to individuals are not coveredGeneral intangibles - This is a residual category, designed to include many kinds of collateral that do not appear elsewhere on the list, such as copyrights, patents, trademarks, goodwill, and the right to payment of some loans.Chattel paper - a record that indicates two things:

(1) an obligor owes moneyand (2) a secured party has a security interest in specific goodsMost commonly occurs in a consumer sale on creditThe same chattel paper may be collateral for a second security interestElectronic chattel paper is the same thing, except that it is an electronicrecord rather than a written one

Goods - movable things, including fixtures, crops, and manufactured homesFor purposes of secured transactions, the Code divides goods into additional categories. In some cases, the rights of the parties will depend upon what category the goods fall into. These are the key categories:

Consumer goods are those used primarily for personal, family, or household purposesFarm products are crops, livestock, or supplies used directly in farming operations (as opposed to the business aspects of farming).Inventory consists of goods held by someone for sale or lease, such as all of the beds and chairs in a furniture store.Equipment refers to things used in running a business, such as the desks, telephones, and computers needed to operate a retail store.

SoftwareDistinguishes software from goodsA program embedded in a computer counts as goods if it is customarily considered part ofthose goods or if, by purchasing the goods, the owner acquires the right to use the program.A program that does not meet those criteria is termed software, and will be treated differently for some purposes.

Attachment of a security interestAttachment - the secured party has taken all of the following steps to create an enforceable security interest

The two parties made a security agreement, and either the debtor has authenticated a securityagreement describing the collateral or the secured party has obtained possession or control;The secured party has given value to obtain the security agreement; andThe debtor has rights in the collateral.

AgreementWithout an agreement, there can be no security interest

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Generally, will be in writing and signed by the debtor or electronically recorded and authenticated by the debtorThe agreement must reasonably identify the collateral. A description of collateral by type isoften acceptable.

Control and possessionsthe security agreement need not be in writing if the parties have an oral agreement and the secured party has either control or possession.Control

For deposit accounts, electronic chattel paper and certain other collateral, the securityinterest attaches if the secured party has control. In a general sense, control means that the secured party has certain exclusive rights to dispose of the collateral.

Deposit account (in a bank). The secured party has control if it is itself the bankholding the deposit or if the debtor has authorized the bank to dispose of fundsaccording to the secured party’s instructions.Electronic chattel paper - A secured party has control of electronic chattel paper when it possesses the only authoritative copy of it, and the record(s) designate the secured party as the assignee. Investment property and letter-of-credit rights - The Code specifies analogousmethods of controlling investment properties and letter-of-credit rights

PossessionsFor most other forms of collateral, including goods, securities, and most other items, asecurity interest attaches if the secured party has possession.

In Re CFLC, Inc.Facts:

Expeditors, a freight company that supervised importing/exporting for Everex SystemsExpeditors frequently had possession of Everex's goodsDuring 17 month period, Expeditors sent over 300 invoices to Everex; all said customer either had to accept all of the invoice's terms or to pay cash, receiving no work on credit; gave Expeditors a general lien on all of the customer's property in its possessionEverex filed for bankruptcyExpeditors expedited its way into court proceedings, claiming right to sell Everex's goods worth about $81,000Trial judge rejected the claim, ruling Expeditors lacked valid security interest

Issue: Did Expeditors have a security interest in Everex's goods?Decision:

Doing business for 1.5 years; never discussed the terms of the invoice nor negotiated for a security interestEverex never expressly acknowledged the invoice terms by accepting or objecting to them, nor did it take actions which acknowledged Expeditors' alleged general lien on the goods; only pertinent acts were its payment of the invoices and silence as to the added termsEvidence consisting of Everex's receipt and payment of invoices containing terms for a general lien in the goods in favor of Expeditors did not amount to an agreement for such a security interest, pursuant to [revised section 9-102]Repetitive sending by Expeditors to Everex of terms which expeditors wished to be made part of the oral contract was not evidence of course of dealing because an agreement did not exist as to the security interest which could be supplemented by such evidenceAffirmed

ValueFor security interest to attach, the secured party must give value

Future value

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Parties may also agree that some of the value will be given in the futureDebtor rights in the collateral

The debtor can grant a security interest in goods only if he has some legal right to those goods himself. Typically, the debtor owns the goods. But a debtor may also give a security interest if he is leasing the goods or even if he is a bailee, meaning that he is lawfully holding them for someone else.Once the security interest has attached to the collateral, the secured party is protectedagainst the debtor. If the debtor fails to pay, the secured party may repossess the collateral.

Attachment to Future PropertyThe security agreement may specify that the security interest attaches to personal property that the debtor does not yet possess but might obtain in the future.

After-Acquired PropertyAfter-acquired property refers to items that the debtor obtains after the parties have made their security agreement. The parties may agree that the security interest attaches to after-acquired property.

ProceedsProceeds are whatever is obtained by a debtor who sells the collateral or otherwise disposes of it. The secured party automatically obtains a security interest in the proceeds of the collateral, unless the security agreement states otherwise.

PerfectionNothing less than perfection

Once the security interest has attached to the collateral, the secured party is protected against the debtor, but it may not be protected against anyone else.There are several kinds of perfection:

Perfection by filingPerfection by possessionPerfection of consumer goodsPerfection of movable collateral and fixtures

Perfection by FilingThe most common way to perfect an interest is by filing a financing statement with one or more state agenciesA financing statement gives the names of all parties, describes the collateral, and outlines the security interest, enabling any interested person to learn about it.If the collateral is either accounts or general intangibles, filing is the only way to perfect.

Contents of the financing statementA financing statement is sufficient if it provides the name of the debtor, the name of thesecured party, and an indication of the collateralThe name of the debtor is critical because that is what an interested person will use to search among the millions of other financing statements on file.a financing statement is effective if a computer search run under the debtor’s correct name produces it.Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc.

Facts:Corona leased farmland to a strawberry farmed Armando Munoz Juarez; signed the lease Armando MunozCorona advanced $ for payroll and farm production expenses; filed a UCC-1 financing statement, claiming security interest in the strawberry cropFinancing statement listed debtor's name as "Armando Munoz"6 months later, Armando Munoz Juarez contracted with Frozsun Foods, Inc to sell processed strawberriesFrozsun advanced money and filed financing statement listed debtor as Armando Juarez

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By the next year, strawberry farmed owed Corona $230,000 and Frozsun $19,600; when he was unable to make payment on Corona's loan, the company repossessed the farmland and strawberriesBoth Corona and Frozsunc claimed proceeds of the cropTrial court awarded money to Frozsun, finding Coronoa filed its statement under wrong last name and therefore failed to perfec its security interest

Issue: Did coronoa correctly file its financing statement?Decision:

No evidence was presented that the financing statement would have been discovered under debtor's true legal name, using the filing office' standard search logicWrong debtor name in appellants' financing statement was seriously misleadingAppellants: Mexican convention of using father's last name, then mother's last name; but debot'rs last name did not change when he crossed the borderAppelants knew the debtor's legal last nameAppellants are defeated by their own pleadingsAffirmed

Article 9-2010 Amendmentsstates will require that for individuals,the name on a financing statement be the same as that on a person’s driver’s license.

Debtor's signatureNotice one important item that is not required on a financing statement: the debtor’s signature

Place of filingA secured party must file in the state of the debtor’s location. An individual is located athis principal residence.Article 9 prescribes central filing within the state for most types of collateral. For goods, the central location will typically be the Secretary of State’s office, although a state may designate some other office if it wishes. For fixtures, the secured party generally has a choice between filing in the same central office that is used for goods (which, again, is usually the Secretary of State’s office), or filing in the local county office that would be used to file real estate mortgages

Duration of filingOnce filed, effective for five yearsAfter five years, the statement will expire and leave the secured party unprotected, unless she files a continuation statement within six months prior to expiration. The continuation statement is valid for an additional five years, and if necessary, a secured party may continue to file one periodically, forever

Perfection by Possession or ControlPledge - a secured transaction in which a debtor gives collateral to the secured party

PossessionWhen may a party use possession? Whenever the collateral is goods, negotiable documents,Instruments, money, chattel paper that is tangible (as opposed to electronic), or most securitiesAdvantages

Notice to other parties is very effectivePossession enables the creditor to ensure that the collateral will not be damaged during the life of the security interestIf the debtor defaults, a secured party has no difficulties repossessing goods that it already holds

For some collateral, possession is impracticalMandatory possession

A party must perfect a security interest in money by taking possessionControl

A security interest in investment property, deposit accounts, letter-of-credit rights, and electronic chattel paper may be perfected by control.Control means that the secured pary has certain exclusive rights to dispose of the collateral

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Mandatory controlSecurity interests in deposit accounts and letter-of-credit rights may be perfected only by control

Care of the collateralPossession and control give several advantages to the secured party, but also one important duty: a secured party must use reasonable care in the custody and preservation of collateral in her possession or controlreasonable care in the custody and preservation of collateralIf the collateral is something tangible, such as a painting, the secured party must take reasonable steps to ensure that it is safe from harm.

Layne v. Bank OneFacts:

Charles E. Johnson, founder and CEO of PurchasePro.com, Inc. and Geoff Layne was the marketing directorWhen their internet stock went public, both officers suddenly owned shares worth millions of dollars; to increase liquidty, Johnson took out a loan for $2.8M and Layne borrowed $3.25MEach secured the loan with shares of purchasePro stockLoan agreement required a loan-to-value (LTV) ratio of 50%, meaning the value of the shares had to be at least double the outstanding loan balance; if value of shares sank below the required level, two men could either pay off some of the loan or offer additional security; if two failed to remedy the problem, bank was entitled (but not obligated) to sell the shares; Johnson secured his loan with $6.9M worth of PP stockIn February, Internet stocks plummeted, and both loans immediately exceeded their LTV ratio; Johnson and Layne spoke with the bank saying they'd offer more collateralIn March and April, more calls went back and forth, debtors occasionally suggesting that the collateral be sold, while at other times agreeing to provide more securityIn july, over a 4-day period, the bank sold Johnson's shares for $524,757, less than 10% of its original worthTwo filed suit against the bank claiming it failed to exercise reasonable care of the collateralTrial court gave judgment for bank

Issue: did the bank exercise reasonable care of the shares?Decision:

UCC states that " a secured party shall use reasonable care in the custody and preservation of collateral in the secured party's possession. In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed"The comment to §9-207 states that the provision “imposes a duty of care, similar to that imposed on a pledgee at common law, on a secured party in possession of collateral,” and cites to [a different treatise that says,]“The pledgee is not liable for a decline in the value of pledged instruments, even if timely action could have prevented such decline.” In the context of pledged stock, courts have used this language to hold that “a bank has no duty to its borrower to sell collateral stock of declining value.”Another court stated, “It is the borrower who makes the investment decision to purchase stock. A lender in these situations merely accepts the stock as collateral, and does not thereby itself invest in the issuing firm. Given the volatility of the stock market, a requirement that a secured party sell shares held as collateral, at a particular time, would be to shift the investment risk from the borrower to the lender.”A lender has no obligation to sell pledged stock held as collateral merely because of a market decline. If the borrower is concerned with the decline in the share value, it is his responsibility, rather than that of the lender, to take appropriate remedial steps, such as paying off the loan in

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return for the collateral, substituting the pledged stock with other equally valued assets, or selling the pledged stock himself and paying off the loan.

Perfection of Consumer GoodsThe UCC gives special treatment to security interests in most consumer goodsPurchase money security interest (PMSI) - one taken by the person who sells the collateral or by the person who advances money so the debtor can buy the collateralPMSI in consumer goods perfects automatically, without filing

Perfection of Movable Collateral and FixturesMovable Goods Generally

For most collateral, when the debtor moves to a new state, a security interest from the oldstate remains perfected for four months; when the collateral is transferred to a new state, thesecurity interest remains perfected for one year.If the secured party re-perfects in the newState within the time limits mentioned, the security interest remains valid until it would normallyexpire. If the secured party fails to re-perfect in the new state, the security interest lapses.

Motor Vehicles and the LikeMotor Vehicles and the LikeThe UCC’s provisions about perfecting generally do not apply to motor vehicles, trailers, mobile homes, boats, or farm tractorsState title laws generally require that a security interest in an automobile be noted directly on the vehicle’s certificate of title.

FixturesGoods that have become attached to real estateA security interest may be created in goods that are fixtures and may continue in goods that become fixtures;UCC does not permit a security interest in ordinary building materials, such as lumber and concrete, once they become part of a construction projectCommon disputes concern:

The status of the personal property when the security interest was created (was it still goods, or had it already been attached to real estate and become a fixture?);The status of the real estate (does the debtor also have a legal interest in the real property?);The type of perfection (which was recorded first, the security interest in the fixture or the real estate? does the secured party hold a PMSI?); andThe physical status of the fixture (can it be removed without damaging the real estate?)

Protection of BuyersGenerally, once a security interest is perfected, it remains effective regardless of whether the collateral is sold, exchanged, or transferred in some other way.

Buyers in Ordinary Course of BusinessBIOC - someone who buys goods in good faith from a seller who routinely deals in such goodsA buyer in ordinary course of business takes the goods free of a security interest created by its seller even though the security interest is perfectedThe BIOC exception is designed to encourage ordinary commerce. A buyer making routine purchases should not be forced to perform a financing check before buying.

Conseco Finance Servicing Corp. v. LeeFacts:

Lila Williams bought a new Roadtrek 200 motor home form New World R.V. Inc; paid about 14,000 down and financed $63,000, giving a security interest to New WorldRV company assigned its security interest to Conseco Finance, which perfected2 years later, Williams returned the vehicle to New World and NW sold the RV to Robert and Ann Lee for $42,800; year later, Williams defaulted on her payments to Conseco

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The Lees sued Conseco claiming to be BIOCs and asking for a court declaration that they had sole title to the Roadtrek; Conseco counterclaimed, seeking titel based on its perfectly security interest; trial court ruled Lees were BIOCs with full rights to the vehicleConseco appealed

Issue: Were the Lees BIOCsArgument for Conseco

Under UCC 9-319 a BIOC takes free of a security interest created by the buyer's seller; buyers were Lees, seller was New World; NW didn't create the security interest - Lila Williams did; no security interest created by NW; security interest held by Conseco was created by someone else (williams) and is not affected by the Lees' status as BIOC

Argument for the Lees:Conseco is really saying that two honest buyers, acting in good faith, can walk into an RV dealership, spend $42,000 for a used vehicle and end up with nothing

Rebuttal from ConsecoNW which knew that Williams financed the Rv and knew who held the security interest, never bothered to check on the status of the payments; if the Lees have suffered wrongdoing, it is at the hands of an irresponsible seller - the company they chose to work with, the company from whom they must seek relief

Rebuttal from the LeesPurpose of the UC is to make dealing fair and commerce work; one of its methods is to get away from obscure , technical arguments; what buyers will ever pay serious money - any oney- for a used vehicle, knowing that thousands of dollars later, the car might be towed out of their driveway by a finance company they never heard of

Buyers of consumer goodsIn the case of consumer goods purchased from a debtor-seller, a buyer takes free of a security interest if he is not aware of the security interest, he pays value for the goods, he is buying for his own family or household use, and the second party has not yet filed a financing statement.

Buyers of Chattel Paper, Instruments, and DocumentsA buyer who purchases chattel paper or an instrument in the ordinary course of her business and then takes possession generally takes free of any security interestOther paper

Similar rules apply for holders in due course of instruments and for purchasers of securities and documents of title

LiensLien - a security interest created by law, rather than by agreementArtisan's lien - a security interest in personal propertyMechanic's lien - a security created when a worker improves real propertyLandlord's lien

Priorities among creditorsThe party who has priority in the collateral gets it3 principal rules

1st rule: a party with a perfected security interest takes priority over a party with an unperfected interest2nd rule: if neither secured party has perfected, the first interest to attach gets priority3rd rule: between perfected security interests, the first to file or perfect wins

Filing versus control of possessionA secured party may use either filing or control to perfect its security interest in deposit accounts, investment property, and letter-of-credit rights.

The secured party should use controlFor these three types of collateral, a secured party who has control wins over a party who merely filed.

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a secured party may perfect its interest in an instrument either by filing or possession. Once again, possession is the better idea: between competing secured parties, the one who possesses wins, even over one who filed earlier.

Priority Involving a Purchase Money Security InterestYou may recall that a purchase money security interest (PMSI) is a security interest taken by the seller of the collateral or by a lender whose loan enables the debtor to buy the collateral.A PMSI can be created only in goods, fixtures, and software.Parties holding a PMSI often take priority over other perfected security interests in the same goods, even if the other security interest was perfected first.Inventory - goods that a seller is holding for sale or lease in the ordinary course of its businessPMSI in inventory

Takes priority over a conflicting perfected security interest (even one perfected earlier) if 2 conditions are met:

Before filing its PMSI, the secured party must check for earlier security interests and,if there are any, must notify the holder of that interest concerning the new PMSI; andThe secured party must then perfect its PMSI (normally by filing) before the debtorreceives the inventory.

PMSI in Noninventory CollateralA PMSI in collateral other than inventory takes priority over a conflicting security interest if the PMSI is perfected at the time the debtor receives the collateral or within 20days after he receives it

In Re RoserFacts:

Robert Roser obtained a loan from Sovereign which he used for a car19 days later, Sovereign filed a lien with the state of Colorado; bank expected that with a perfected interest, it would have a priority over everyone elseUnknown to sovereign bank, Roser had declared bankruptcy only 12 days after he purchased the carBankruptcy trustee argued that he had priority over Sovereign because the bankruptcy filing happened before Sovereign perfected its security interestSoverign appealed

Issue: Did Sovereign Bank, a PMSI holder, obtain priority over the bankruptcy trustee?Decision:

Bankruptcy Code gives bankruptcy trustee the rights and powers of a person who acquired a judicial lien on the debtor's property at the time that the bankruptcy petition was filedTrustee can avoid liens that are unperfected when the petition for bankruptcy is filedBank presents a straightforward argument why its lien would have priority under Colorado law over a lien of a judgment creditor who obtained judgment at the time Rose filed for bankruptcyNo doubt the Bank satisfied the requirements of this sectionFiling of a lien constitutes the filing of a financing statement; Nor is there any dispute that the Bank held a purchase-money security interest in Roser's vehicle; because the bank filed its lien within 20 days of Roser's obtaining the vehicle, It contends that the UCC gives its lien a priority over any rights in the vehicle - including the Trustee's interestTrustee's arguments to the contrary are not persuasive; cannot avoid the Bank's lien We REVERSE judgment of the district court and REMAND for further proceedings consistent with this opinion

Default and TerminationDefault

Generally, a debtor defaults when he fails to make payments due or enters bankruptcy proceedings. The parties can agree that other acts will constitute default, such as the debtor’s failure to maintain insurance on the

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collateral. When a debtor defaults, the secured party has two principal options:

(1) it may take possession of the collateral, or (2) it may file suit against the debtor for the money owed. The secured party does not have to choose between these two remedies; it may try one remedy, such as repossession, and if that fails, attempt the other

Taking Possession of the CollateralWhen the debtor defaults, the secured party may take possession of the collateral.How does the secured party accomplish this? In either of two ways: the secured party may act on its own, without any court order, and simply take the collateral, provided this can be done without a breach of the peace. Otherwise, the secured party must file suit against the debtor and request that the court order the debtor to deliver the collateral.

Disposition of the CollateralOnce the secured party has obtained possession of the collateral, it has two choicesSecured party may (1) dispose of the collateral or (2) retain the collateral as full satisfaction of the debtDisposal of the Collateral

a secured party may sell, lease, or otherwise dispose of the collateral in any commercially reasonable mannerTypically, the secured party will sell the collateral in either a private or a public sale. First, however, the debtor must receive reasonable notice of the time and place of the sale so that she may bid on the collateral. The higher theprice that the secured party gets for the collateral, the lower the balance still owed by the debtor. Giving the debtor notice of the sale and a chance to bid ensures that the collateral will not be sold for an unreasonably low price.

Deficiency or surplusDebtor is liable for any deficiency

(having insufficient funds to pay off a debt)Surplus - a sum of money greater than the debt incurredWhen a secured party disposes of collateral in a commercially unreasonable manner, then a deficiency or surplus claim may be adjusted based on the sum that should have been obtained

Acceptance of collateralAcceptance - retention of the collateral by a secured party as full or partial satisfaction of a debtPartial satisfaction - means that the debtor will still owe some deficiency to the secured partyA secured party who wishes to accept the collateral must notify the debtor. If the debtor agrees in an authenticated record, then the secured party may keep the collateral as full or partial satisfaction of the debt. If the debtor does not respond within 20 days, the secured party may still accept the collateral as full satisfaction, but not as partial satisfaction. In other words, the debtor’s silence does not give the secured party the right to keep the goods and still sue for more money.A secured party may not accept collateral that is consumer goods if the debtor has possession of the goods or if the debtor has paid 60 percent of the purchase price.

Right of RedemptionRedeem - to pay the full value of a debt to get the collateral back

Proceeding to judgmentA secured party may sue the debtor for the full debt

TerminationA document indicating that a secured party no longer claims a security interest in the collateral For a consumer debt, the secured party must file the termination statement in everyplace that it filed a financing statement. The secured party must do this within one month from the date the debt is fully paid, or within 20 days of a demand from the consumer, whichever comes first. For other transactions, the secured party must, within 20 days, either file the termination statement or send it to the

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secured party so that he may file it himself. In both cases, the goal is the same: to notify all interested parties that the debt is extinguished.

CHAPTER 37 BANKRUPTCY 

More lenient towards debtors rather than lenders

Overview of The Bankruptcy CodeThe Code - divided into 8 chapters

RehabilitationObjective of Chapter 11 and 13 - to rehabilitate the debtorHold creditors at bay while the debtor develops a payment planIn return for retaining some of their assets, debtors typically promise to pay creditors a portion of their future earning

LiquidationWhen debtors are unable to develop a feasible plan for rehabilitation under Ch. 11 or 13 … Chapter 7 provides for liquidation

Aka straight bankruptcyThis form mandates that the bankrupt's assets be distributed to creditors but the debtor has no obligation to share future earnings

Chapter Description

Number Topic Description

Chapter 7 Liquidation The bankrupt's assets are sold to pay creditors. If the debtor owns a business, it terminates. The creditors have no right to the debtor's future earnings.

Chapter 11 Reorganization This chapter is designed for businesses and wealthy individuals. Businesses continue in operation and creditors receive a portion of the debtor's current assets and future earnings.

Chapter 13 Consumer reorganization

Chapter 13 offers reorganization for the typical consumer. Creditors usually receive a portion of the individual's current assets and future earnings.

Debtors sometimes eligible to file under more than one chapterBoth debtors and creditors have the right to ask the court to convert a case from one chapter to another at any time during proceedings

GoalsBankruptcy protection has 3 primary goals:

1. To preserve as much of the debtor's property as possible2. To divide the debtor's assets fairly between the debtor and creditors3. To divide the debtor's assets fairly among creditors

Chapter 7 Liquidation

Filing a petitionAny individual, partnership, corporation, or other business organization that lives, conducts business, or owns property in the US can filed under the CodeCase begins with filing in federal district courtDebtor - someone who cannot pay his debts and files for protection under the Bankruptcy CodeVoluntary petition - filed by a debtor to initiate a bankruptcy caseInvoluntary petition - filed by creditors to initiate a bankruptcy case

Voluntary petition

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Any debtor has the right to fileNo necessary that the debtor's liabilities exceed assetsIndividuals must meet 2 requirements before filing:

1. Within 180 days before the filing, an individual debtor must undergo credit counseling with an approved agency

2. Individual debtors may only file under Ch. 7 if they ear less than the median income in their state or they cannot afford to pay back at least $7,025 over five years; all others generally must file under 11 or 13

Involuntary petitionMust meet all of the following requirements:

1. Debtor must owe at least $14,425 in unsecured claims to the creditors who file2. Debtor has at least 12 creditors, 3 or more must sign the petition. If the debtor has fewer than

12 creditors, any one of them may file a petition3. The creditors must allege either that a custodian for the debtor's property has been appointed

in the prior 120 days or that the debtor has generally not been paying debts that are dueCustodian for the debtor's property: state law sometimes permit the appointment of a custodian to protect a debtor's assets; Code allows creditors to pull a case out from under state law and into federal bankruptcy court by filing an involuntary petitionOrder for relief - an official acknowledgement that a debtor is under the jurisdiction of the bankruptcy court; basically the start of the whole bankruptcy process

TrusteeIs responsible for gathering the bankrupt's assets and dividing them among creditorsU.S. Trustee - oversees the administration of bankruptcy law in a region

CreditorsAfter the court issues an order for relief, the US Trustee calls a meeting of all of the creditors Proof of claim - a form stating the name of an unsecured creditor and the amount of the claim against the debtorSecured creditors do not file proofs of claim unless the claim exceeds the value of their collateral.

Automatic StayProhibits creditors from collecting debts that the bankrupt incurred before the petition was filed

Jackson v. Holiday FurnitureFacts:

Cora and Frank Jackson purchased a recliner on credit from Dan Holiday Furniture; made payments until November; that month, filed for protection under Bankruptcy Code; Dan Holiday received notice of bankruptcy which stated that the store must stop all efforts to collect on the Jacksons' debtDespite notice, Dan Holiday collectors called the Jacksons' house 10 times between 11/15 - 12/1 and left a card threatening repossession; on 12/1 Frank went to pay $230 owed for the two months and allegedly said he and his wife wanted to continue making payments directly to the storeIn early January, Dan Holiday learned Frank had died the month before; after Cora failed to pay for January, a collector called her house 26 times and the store owner's sister left a threatening message; When she returned home she found 7 bright yellow slips of paper stating a truck had been by to repossess the chair; the threat to send a truck was a ruse to scare Cora; Dan Holiday didn't want the recliner, just wanted to talk; also sent a letter that she had 24 hours to bring her account current or else Repossession will be made and legal action will be taken;Cora's lawyer contacted Dan Holiday and collection activity stopped

Issues: Did Dan Holiday violate the automatic stay provision of the Bankruptcy Code? What is the penalty for a violation?Judge's Decision:

Automatic stay prohibits the commencement or continuation of any action against the debtor that arose before the commencement of the bankruptcy case and forbids any act by a pre-petition creditor to obtain possession of property of the bankruptcy estate

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An injured individual by a creditor's violation of the automatic stay shall recover actual damages, and may recover punitive damagesNo question Dan Holiday repeatedly violated the automatic stay

Bankruptcy EstateThe new legal entity created when a debtor files a bankruptcy petition; the debtor's existing assets pass into the estate

Exempt PropertyThe Code permits individual debtors (but not organizations) to keep some property for themselvesSaves the debtor from destitution during bankruptcy processCode defers to state law; permits states to opt out of the federal system and define a different sent of exemptionsUnder Federal Code, a debtor is allowed to exempt only $21,625; most states exempt items such as the debtor's home, household goods, cars, work tools, disability and pension benefits, alimony, and health aidsSome states set no limit on the value of exempt property

Voidable preferencesPreference - when a debtor unfairly pays creditors immediately before filing a bankruptcy petitionCan take two preferences: payments and liensPayment - simply means that the debtor gives a creditor cash that would otherwise end up in the bankruptcy estateLien - a security interest in the debtor's propertyIf the debtor grants a security interest in specific property, he vaults that creditor out of the great unwashed mass of unsecured creditors and into the elite company of secured creditorsThe trustee can void any transfer (whether payment or lien) that meets all of the following requirements:

Transfer was to a creditor of the bankruptIt was to pay an existing debtThe creditor received more from the transfer than she would have received during the bankruptcy processThe debtor's liabilities exceeded assets at the time of the transferThe transfer took place in the 90-day period before the filing of the petition

Trustee can void a transfer to an insider that occurs in the year preceding the filing of the petitionInsiders - family members of an individual, officers and directors of a corporation, or partners of a partnership

Fraudulent TransfersA transfer is fraudulent if it made within the year before a petition is filed and its purpose is to hinder, delay, or defraud creditorsThe trustee can void any fraudulent transferA trustee cannot void pre-petition payments made in the ordinary courseThe trustee cannot void payments below $600 or other routine payments

Payment of ClaimsThe Code has adopted a number system to prevent a free-for-all fight over the bankrupt's assetsAll claims are placed in one of three classes (1) secured claims (2) priority claims - 7 subcategories (3) unsecured claims - 3 subcategoriesThe trustee pays the bankruptcy estate to the various classes of claims in order of rank; a higher class is paid in full before the next class receives any payment at allIf there aren't enough funds to pay an entire subcategory, all claimants of unsecured claims are treated the same, and if there isn't enough funds to pay the entire class, everyone in the class shares pro rata.Secured Claims

Those secured by specific collateral are paid firstThey are paid by selling a specific asset, not out of the general funds of the estate

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When the collateral is not valuable enough to pay off the entire secured debt, the creditor must wait in line with the unsecured creditors for the balance

Priority Claims7 subcategories of priority claimsEach category is paid in order

Alimony and child supportAdministrative expenses (trustee, lawyers, accountants)Gap expenses: if creditors file an involuntary petition, the debtor will continue to operate her business until the order for relief; any expenses she incurs in the ordinary course of her business during this so-called gap period are paid now

Gap period - the period between the time that a creditor files an involuntary petition and the court issues the order for relief

Payments to employeesEmployee benefit plansConsumer depositsTaxesIntoxication injuries

Unsecured claimsAll unsecured subcategories have an equal claim and must be paid togetherSecured claims that exceed the value of the available collateralPriority claims that exceed the priority limitsAll other unsecured claims

DischargeFresh start - after the termination of a bankruptcy case, creditors cannot make a claim against the debtor for money owed before the initial bankruptcy petition was filedOnce a bankruptcy estate has been distributed to creditors, they cannot make a claim against the debtor for money owed before the filing, whether or not they actually received any paymentDischarge - the debtor no longer has an obligation to pay a debtCode limits both the type of debts that can be discharged and the circumstances under which discharge can take place

Debts that cannot be dischargedFollowing are never discharged and the debtor remains liable in full until they are paid:

Income taxes for the three years prior to filing and property taxes for the prior yearMoney obtained fraudulentlyAny loan of more than $600 that a consumer uses to purchase luxury goods within 90 days before the order for relief is grantedCash advances on a credit card totaling more than $875 that an individual debtor takes out within 70 days before the order for reliefDebts omitted from the Schedule of Assets and Liabilities that the debtor filed with the petition, if the creditor did not know about the bankruptcy and therefore did not file a proof of claimMoney that the debtor stole or obtained through a violation of fiduciary dutyMoney owed for alimony or child supportDebts stemming from intentional and malicious injuryFines and penalties owed to the governmentLiability for injuries caused by the debtor while operating a vehicle under the influence of drugs or alcoholLiability for breach of duty to a bank Debts stemming from a violation of securities lawsStudent loans can be discharged only if repayment would cause undue hardship (very hard to prove)

In Re Stern

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Facts: James Stern took out student loans; after found difficult finding a job as a lawyer so he opened his own practice; he and his wife earned less than $20,000 a yearWas sued for malpractice; he won but his insurance premium increased so much he could no longer afford the insuranceBelieve his debt and default on his student loans made him unemployable as a lawyer, he and his wife moved to her native France; he didn't speak French and couldn't get a job; his wife's income over 6 months was $2200; their expenses were more expensive in FranceStern owed $147,000 in students loans ($56,000 in principal, $91,000 interest); asked the court to discharge these loans on grounds of undue hardship: "I can't possibly pay this amount and have a life, not with what I expect I'll be able to earn."

Issue: Is Stern entitled to a discharge of his student loans on grounds of undue hardshipJudge's Decision:

To obtain a discharge: must prove his present inability to pay his student loans, and establish his current financial hardship is likely to be long-termStern went to college and law school; borrowers are obligated to repay loans even if they're unable to obtain employment in their chosen field of study;Court finds disturbing Stern's failure to maximize his income and minimize his expenses; no evidence he made any effort to obtain employment in the US to enhance his earningsStern says he'd prefer to use his monies on home mortgage or raising children, but the fact that they are unattainable because of the loans does not fit "undue hardship"There are other career opportunities available to him

Circumstances that prevent debts from being dischargedBusiness organizations

Under Chapter 7 - only the debts of individuals can be discharged, not those of business organizations; once assets have been distributed, the organization must cease operation; if it continues, it's responsible for all pre-petition debts

RevocationA court can revoke a discharge within one year if it discovers the debtor engaged in fraud or concealment

Dishonesty or bad faith behaviorThe court may deny discharge altogether if the debtor has, for example, made fraudulent transfers, hidden assets, falsified records, disobeyed court orders, refused to testify, or otherwise acted in bad faith

Repeated filings for bankruptcyA debtor who has received a discharge under Chapter 7 or 11 cannot receive another discharge under Chapter 7 for at least 8 years after the prior filing; a debtor who received a prior discharge under Chapter 13 cannot in most cases receive one under Chapter 7 for at least six years

ReaffirmationReaffirm - to promise to pay a debt even after it's dischargedMay want to reaffirm to a secured debt to avoid losing the collateralTo be valid, reaffirmation must:

Not violate common law standards for fraud, duress, or unconscionability; if creditors force a bankrupt into reaffirming a debt, the reaffirmation is invalidHave been filed in court before the discharge is grantedInclude the detailed disclosure statement required by the statute (Section 524)Be approved by the court if the debtor is not represented by an attorney or if, as a result of the reaffirmed debt, the bankrupt's expenses exceed his income

In Re: GrishamFacts:

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2 months before filing for bankruptcy, Grisham bought a Dodge truck; at the time of filing it was worth $16,000 but he owed $17,500 on it; annual interest rate was 17.5%; monthly payments were $400 and the schedule was almost 6 yearsIn addition, he owed $274,000 to IRS, alimony, student loans, unsecured debt

Issue: Would reaffirmation of this debt create an undue hardship for the debtor?Decision:

Debtor describes himself as retired/unemployed; only source of income $1928/month social security + $1698/month in unemployment benefitsOwns no real property and currently lives rent-free at a relative's homeAfter deducting living expenses, net income is -$1091In this circumstance the payments are unduly burdensome; several obligations that will likely survive his discharge in bankruptcy (IRS debt, alimony, student loans)Court will not stamp its seal of approval on the Debtor's reaffirmation of the debt; to do so would create hardship on this debtor and doesn't otherwise seem justifiedReaffirmation agreement is disapproved

Chapter 11 ReorganizationReviving a business so it can ultimately emerge as a viable economic companyProceedings: a petition (voluntary or involuntary), order for relief, meeting of creditors, proofs of claim, and an automatic stay

Debtor in possessionChapter 11 does not require a trusteeThe debtor acts as trustee in a Chapter 11 bankruptcyTwo jobs: to operate the business and to develop a plan of reorganizationTrustee chosen only if the debtor is incompetent or uncooperative

Creditors' committeeProtects the interests of its constituency and may play a role in developing the plan of reorganizationCommunicates with all creditorsUS Trustee appoints the 7 largest unsecured creditors to the committee; may be required to appoint some small-business creditors as wellIf it’s a corporation, may also appoint a committee of shareholdersCode refers to the claims of creditors and the interests of shareholders

Plan of reorganizationOnce petition is filed, an automatic stay goes into effect to provide the debtor with temporary relief from creditorsNext stage: develop a plan of reorganization that provides for the payment of debts and the continuation of the businessFor the first 120 days (which the court can extend up to 18 months), the debtor has the exclusive right to propose a planIf the debtor fails to file a plan, or if the court rejects it, then creditors and shareholders can develop their own plan

Confirmation of the planDisclosure statement - provide creditors and shareholders with enough information to make an informed judgment; must be court-approved before its sent out to creditors and shareholdersAll creditors and shareholders have the right to vote on the plan of reorganization; each creditor and shareholder is assigned to a classClasses:

1. Secured claims2. Priority claims3. Unsecured claims

Each secured claim is usually in its own class because each one if secured by different collateral; also divided based on their interests

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After the vote, the bankruptcy court holds a confirmation hearing to determine whether it should accept the plan. The court will approve a plan if a majority of each class votes in favor it and if the "yes" votes hold at least 2/3rs of the total debt in that classCramdown - court can still confirm the plan even if some classes vote against the plan (the plan is crammed down the creditors' throats); will not impose a cramdown unless, in its view, the plan is feasible and fair

In Re FoxFacts:

Donald Fox founded Midland Fumigant, Inc; In a prior case, a competitor obtained a verdict of $2million against Midland and Fox for fraudUnable to pay judgment, Fox filed a voluntary petition under Chapter 11 of the Bankruptcy Code; his plan of reorganization envisioned that he would use revenues from Midland to pay off his creditors in full over five years, with interestFox hired a CPA to analyze the feasibility of the plan; concluded that the plan's projections were conservative and could be met easily Had 6 classes of creditors; all the classes accepted the plan except the two in which United was in; bankruptcy judge noted that United had an incentive to opposed the reorganization because if Midland ceased operations, it would be able to raise its prices substantially

Issues: Was Fox's plan or reorganization feasible and fair? Should the court impose a cramdown?Decision:

Debtor has proposed a plan which pays all creditors in full, with interest; has provided a reasonable and orderly repayment of his debts Plan has a reasonable assurance of success; also United States Trustee has filed a statement in support of confirmation of the PlanDebtor's plan is confirmed over the objection of United and over the dissenting votes of the classes

DischargeA confirmed plan of reorganization is binding on the debtor, creditors, and shareholdersDebtor now owns the assets in the bankrupt estate, free of all obligations except those listed in the planChapter 7 debtor typically relinquishes all assets (except exempt property) to creditors but then has no obligation to turn over future income

Small-business bankruptcyFor businesses with less than $2million in debtAfter the order for relief, the bankrupt has the exclusive right to file a plan for 180 days; both a plan and a disclosure statement must be filed within 300 daysCourt must confirm or reject the plan within 45 days after its filingIf deadlines are not met, the case can be converted to chapter 7 or dismissed

Chapter 13 Consumer ReorganizationsPurpose is to rehabilitate an individual debtorNot available to businesses or individuals with more than $360,475 in unsecured debts or $1,081,400 in secured debtsTypically keeps most of her assets in exchange for a promise to repay some of her debts using future incomeTo be eligible, must have a regular source of incomeEasier and cheaper than chapter 7 and 11; consequently more money is retained for both creditors and debtor

Marrama v. Citizens Bank of MassachusettsFacts:

When Robert Marrama filed a voluntary petition under Chapter 7, he liedDisclosed he was the sole beneficiary of a trust that owned a house in Maine, but listed value of house as $0; also denied he had transferred any property during the prior year (had given it for free to the trust 7 months prior to filing for bankruptcy protection)Lied when he claimed he was not entitled to a tax refund; knew he had a check for $8700 from the IRS coming in the mail

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Marrama found out bankruptcy trustees were going after the Maine property, he filed a notice to convert his chapter 7 to chapter 13; trustees and creditors objected; contend because Marrama acted in bad faith he shouldn't be permitted to convert; bankruptcy court and appeals court agreed; Supreme Court granted certiorari

You be the Judge: can a bankruptcy court refuse to allow a debtor to convert from 7 to 13?Argument for Marram:

Allowed to convert with only two restrictions:Bankrupt can convert only onceDebtor must meet the conditions that would have been required for him to file under the new chapter in the first placeNothing said about bad faith

Argument for bankruptcy trustees: Court has unquestioned right to dismiss a chapter 13 petition if the debtor demonstrates bad faithSeems no logical reason why a court would have the right to dismiss a case for bad faith but not the first to prohibit a filing under chapter 13 to begin with

File a petition, creditors submit proofs of claim, the court imposes an automatic stay, the debtor files a plan, the court confirms the planBeginning a chapter 13 case

Debtor must file a voluntary petitionCreditors cannot use an involuntary petition to force a debtor into Chapter 13US Trustee appoints a trustee to supervise the debtor, although the debtor remains in possession of the bankruptcy estate; also serves as a central clearinghouse for the debtor's payments to creditors; debtor pays the trustee who in turn transmits these funds to creditors

Plan of paymentMust file a plan of payment within 15 days after filing the voluntary petitionOnly the debtor can file a plan; the creditors have no right to file their own versionDebtor must (1) commit some future earnings to pay off debts, (2) promise to pay all secured and priority claims in full, and (3) treat all remaining classes equally; if the plan doesn't provide for the debtor to pay off creditors in full, then all of the debtor's disposable income for the next five years must go to creditorsWithin 30 days after filing the plan, must begin making payments to trustee under the plan; only bankruptcy court has authority to confirm or reject a plan of paymentTo confirm a plan, court must ensure that:

Creditors have the opportunity to voice their objections at a hearingAll of the unsecured creditors receive at least as much as they would have if the bankruptcy estate had been liquidated under chapter 7Plan is feasible and the bankruptcy will be able to make the promised paymentsPlan doesn't extend beyond three years without good reason and in no event lasts longer than 5 years; andThe debtor is acting in good faith, making a reasonable effort to pay obligations

DischargeOnce confirmed, a plan is bindingThe debtor is washed clean of all pre-petition debts except those provided for in the plan, but, unlike chapter 7 the debts are not permanently dischargedIf debtor violates the plan, all debts are revived and the court may either dismiss the case or convert it to a liquidation proceeding under chapter 7 Any debtor who has received a discharge under chapter 7 or 11 within the prior 4 years or under chapter 13 within the prior 2 years, is not eligible under chapter 13If the debtor's circumstances change, the debtor, the trustee, or unsecured creditors can ask the court to modify the plan

Conclusion

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Whenever an individual or organization incurs more debts than it can pay in a timely fashion, everyone loses. Debtor loses control of his assets and creditors lose money

Chapter 7 Chapter 11 Chapter 13

Objective Liquidation Reorganization Consumer reorganization

Who Uses it Individual or org. Individual or org. Individual

Type of Petition Voluntary or involuntary Voluntary or involuntary Only voluntary

Administration of Bankruptcy Estate

Trustee Debtor in possession (trustee selected only if debtor is unable to serve)

Trustee

Selection of Trustee Creditors have right to elect trustees; or US Trustee makes appoints

Usually no trustee Appointed by US Trustee

Participation in Formulation of Plan

No plan is filed Both creditors and debtor can propose plans

Only debtor can propose plan

Creditor approval of plan

Creditors do not vote Creditors vote on plan, but court may approve plan without the creditors' support

Creditors do not vote on plan

Impact on Debtor's Post-petition income

Not affected; debtor keeps all future earnings

Must contribute toward payment of pre-petition debts

Must contribute toward payment of pre-petition debts

CHAPTER 39 CONSUMER LAW Introduction

Federal Trade CommissionSeveral options for enforcing the law:

Voluntary complianceWhen it determines that a business has violated the law, it first asks the offender to sign a voluntary compliance affidavit promising to stop the prohibited activity

Administrative hearings and appealsIf it refuses to stop voluntarily, takes the case to an administrative law judge (ALJ) within the agencyViolator may settle the case at this point by signing a consent orderIf case proceeds to a hearing, the ALJ has the right to issue a cease and desist order, commanding the violator to stop the offending activityA defendant can appeal such an order to the five Commissioners of the FTC, from there to a federal appeals court, and ultimately to the US Supreme Court

PenaltiesFTC can impose a fine for each violation of a voluntary compliance affidavit, a consent order, a cease and desist order, an FTC rule, or a cease and desist order issued against someone elseFTC can file suit in federal court asking for damages on behalf of an injured consumer if

1. The defendant has violated FTC rules and2. A reasonable person would have known under the circumstances that the conduct was

dishonest or fraudulent

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Consumer Financial Protection Bureau (CFPB)Regulates consumer financial products and services, including mortgages, credit cards, and private student loansGoals: to clarify and simplify the terms of credit cards, checking accounts, and mortgage disclosure forms

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

Deceptive Acts or PracticesUnder 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.Facts:

Direct Marketing Concepts, Inc. broad cast an infomercial for Coral Calcium that featured a spokesperson named Robert Barefoot; claimed virtually all diseases are caused by a condition called acidosis; further claimed that calcium derived from coral cures these diseases by rendering the body more alkaline and made false claims that people had said it cured them of cancer/I've see people jump out of wheelchairs"Noted unspecified articles from several medical journalsOver 18 months, generated $54 million in salesFTC filed suit against the company and its owners, alleging that the infomercials were deceptive; trial court granted FTCs motion for summary judgment, ruling the infomercials were misleading as a matter of law, and therefore there was no need for a trial; defendants appealed

Issue: Were these infomercials misleading as a matter of law?Decision:

When FTC brings action based on theory of deceptive ads because advertises lacked a reasonable basis for claims, FTC must:

1. Demonstrate what evidence would in fact establish such a claim in the relevant scientific community; and

2. Compare the advertisers' evidence to that required by the scientific community to see if the claims have been established

Produced four expert declarations which demonstrated that the claims could be substantiated by double-blind, placebo-controlled human studies; scientific evidence is required for substantiation and defendants neither produced nor pointed to any evidence any facts; summary judgment was appropriateExperts specifically opined that

1. No evidence that calcium cures cancer2. Some evidence that calcium might lower blood pressure but none that it cures heart disease3. No evidence whatsoever that calcium has any effect on autoimmune disorders, and4. No research published in the medical journals that indicate calcium "reverses" cancer

Defendants claims only puffery which was further attenuated by the presence of general disclaimers; however specific and measurable claims are not puffery and may be the subject of deceptive advertising claims Disclaims or qualifications in any ad are not adequate to avoid liability unless they are sufficiently prominent and unambiguous to change the apparent impression; this infomercial's transcripts reveal only disclaimers that the infomercials are paid advertising; the health claims were bold and straightforward, presented by supposed experts as testable observations backed up by clinical trials and studiesAffirm district court's grant of summary judgment

Unfair PracticesThe Commission considers a practice to be unfair if it meets all of the following three tests:

It causes a substantial consumer injury Physical or financial injury

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The harm of the injury outweighs any countervailing benefitThe consumer could not reasonably avoid the injury

FTC vigilant in protecting susceptible consumers, i.e., elderly or the illIn addition, the FTC may decide that a practice is unfair simply because it violates public poicy, even if it does not meet these three theses

Additional Sales RulesBait-and-Switch

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 productsFTC 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

Merchandise bought by mail, by telephone, or onlineThe FTC has established the following rules for this type of merchandise:

Sellers must ship an item within the time state or, if no time is given, within 30 days after receipt of the orderIf 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 validIf 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

TelemarketingFTC prohibits telemarketers from calling any telephone number listed on its do-not-call registry; prohibits telemarketers from blocking their names and telephone numbers on Caller ID systemsRobocalls are illegal unless the telemarketer obtains written permission from the person being called

Unordered merchandiseUnder Section 5 of the fTC Act, anyone who receives unordered merchandise in the mail can treat it as a gift

Door-to-door salesConsumers at home need special protection from unscrupulous salespeople A salesperson is required to notify the buyer that she has the right to cancel the transaction prior to midnight of the third business day thereafterNotice must be given both orally and in writing, actual cancellation must be in writing; seller must return the buyer's money within 10 days

Consumer CreditTruth in Lending Act - General Provisions

Requires lenders to disclose the terms of a loan in an understandable and complete mannerApplicability

TILA applies to a transaction only if all of the following tests are met:It's a consumer loanLoan has a finance charge or will be repaid in more than four installmentsThe loan is for less than $50,000, is secured by a mortgage on real estate, or is a private education loanThe loan is made by someone in the business of offering credit

DisclosureAll TILA loans. In all loans regulated by TILA:

The disclosure must be clear and in meaningful sequenceThe lender must disclose the finance charge

Finance charge is the amount, in dollars, the consumer will pay in interest and fees over the life of the loanThe creditor must also disclose the annual percentage rate (APR)

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The actual rate of interest the consumer pays on an annual basisAll TILA loans must meet these 3 requirements; requires additional disclosure for 2 types of loans: open-end credit and closed-end credit

Closed-end creditThe loan is a fixed amount and the borrower knows the payment schedule in advanceBefore a consumer enters into a closed-end transaction, the lender must disclose:

The cash price, total down payment, amount financed; itemized list of all other charges; number, amount, and due dates of payments; total amount of payments; late payment charges; penalties for prepaying the loan; and lender's security interest in the item purchased

AdvertisingTILA requires lenders to advertise their rates accuratelyIf the lender advertises any credit terms, it must tell the whole story

EnforcementFTC generally has the right to enforce TILAConsumers who've been injured by any violation (except for the advertising provisions) have the right to file suit

Home LoansMortgage Loans

TILA prohibits unfair, abusive, or deceptive home mortgage lending practicesUnder TILA, lenders:

Must make a good faith effort to determine whether a borrower can afford to repay the loanMay not coerce or bribe an appraiser into misstating a home's valueCannot charge prepayment penalties on adjustable rate mortgages

TILA regulates subprime loans (aka higher-priced mortgage loans; loans that have an above-market interest rate because they involve high-risk borrowers; for sub-prime loans, a lender

Must collect property taxes and homeowners insurance for all first mortgagesMay not make loans that have balloon payments (very large payments at the end)May not charge excessive late fees)

Home Equity LoansSwindlers offer home equity loans, secured by a second mortgage, to finance fraudulent repairs (though there are legitimate lenders)If a home equity installment loan:

Has an APR more than 10% points higher than Treasury securities, or the consumer must pay fees and points at closing that are higher than 8% of the total loan amount, then …… at least 3 business days before the loan closing, the lender must notify the consumer that

1. He doesn't have to go through with the loan and2. He could lose his house if he fails to make payments

Loans that are for less than 5 year may not contain balloon paymentsRescission

Consumers have the right to rescind a mortgage for up to 3 business days after the signing (including Saturdays); if lender doesn't comply with the disclosure provisions of TILA, the consumer can rescind for up to 3 years from the date of the mortgageRight of rescission does not apply to a first mortgage used to finance a house purchase or to any refinancing with the consumer's existing lender

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TILA applies to a transaction only if: It's a consumer loan

Loan has a finance charge or will be repaid in more than 4 installments

Loan is for less than $50,000 or to secure a mortgage on real estate

Loan is made by someone in the business of offering credit

In all loans regulated by TILA Disclosure must be clear and in meaningful sequence

Lender must disclose the finance change and the APR

For regular mortgage loans Lenders musty verify the borrowers' ability to repay the loan; lenders may not coerce or bribe an appraiser into misstating a home's value; lenders cannot charge prepayment penalties on adjustable rate mortgages

For subprime mortgage loans Loans with balloon payments are prohibited

Late fees are limited

Credit Cards

DisclosureOpen-end credit: credit transaction in which the lender makes a series of loans that the consume can repay at once or in installmentsRules apply to all consumer credit cardsIn any advertisement or solicitation, the lender must disclose:

Credit termsIn case of a teaser rate, must clearly disclose that the rate is introductory, when it expires, and the permanent rate that will replace it

Before establishing an open-end credit account, the lender must disclose to the consumer:When a finance charge will be imposed, andHow the finance charge will be calculated

In each monthly statement, the lender must disclose:The amount owed at the beginning of the billing cycleAmounts and dates of all purchases, credits, and paymentsFinance charges and late feesDate by which a bill must be paid to avoid these charges; andEither the consequence of making the monthly minimum payment or a toll-free number that can be used to obtain such information

Regulation of Credit Card DebtCredit Card Act of 2009: companies,

Cannot increase 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 paymentMust give 45 days' notice before increasing a card's APR or making any other significant change in credit termsMust re-evaluate any rate increase every six months, and then, if a decrease is warranted, it must occur within 45 days after the evaluationMust give notice of the consumer's right to cancel a card and pay off the debt once the APR is changedCannot charge interest on fees or on a bill that is paid on time or during a grace periodCannot 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 or the company can show that its costs justify a higher fee

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Cannot charge late fees that are greater than the minimum payment owedCannot charge more than one fee per event, such as a single late paymentMust mail the bill at least 21 days before the due date, disclose what the due date is, and set the same due date each monthCannot set due dates on weekends or in the middle of the dayMust warn consumers about the impact of making minimum-only paymentsMust apply any payments to whichever debt on the card has the highest interest rateMust offer consumers the right to set a fixed credit limit; consumers cannot be charged a fee if the company accepts charges above that limit unless the consumer has agreed to the feeCannot issue credit cards to people under 21 unless the person has income or the application is co-signed by someone who can afford to pay the bills

LiabilityStolen Cards

You are liable only for the first $50 in charges the thief makes before you notify the credit card companyIf the thief steals just your credit card number, but not the card itself, you are not liable for any unauthorized charges

Disputes with merchantsIn the event of a dispute between a customer and a merchant, the credit card company cannot bill the customer if

1. She makes a good faith effort to resolve the dispute2. The dispute is for more than $50, and3. The merchant is in the same state where she lives or is within 100 miles of her home

If a customer seems to have a reasonable claim against a merchant, the credit card company will typically transfer the credit it has given the merchant back to the customer's account

Disputes with the credit card companyThe Fair Credit Billing Act (FCBA) provides additional protection for credit card holders (and for holders of so-called revolving charge accounts) - such as those from stores)Under the 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 daysWithin two billing cycles (but no more than 90 days) the credit card company must investigate the company and respond:

In the case of an error, by correcting the mistake and notifying the consumerIf there is no error, by writing to the consumer with an explanation

Whether or not there was a mistake, if the consumer requests it, the credit card company must supply documentary evidence to support its positionThe credit card company cannot try to collect the disputed debt or close or suspend the account until it has responded to the consumer complaintThe 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's disputed

Gray v. American Express Co.Facts:

In December, Gray used his AmEx credit card to buy airline tickets costing $9,312; AmEx agreed to let him pay for it in 12 monthly installmentsPaid installments in January and FebruaryAmEx accidentally billed Gray by mistake for the entire balance in March; Gray didn't pay

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In April, tried paying for dinner and card was rejected; restaurant was instructed to confiscate and destroy card; spoke with AmEx employee at restaurant and was told account was cancelled as of nowGray wrote to AmEx; for more than a year they failed to respond to Gray or investigate claims and turned bill over to a collection agencyGray sued AmEx for violating the Fair Credit Billing Act; trial court granted summary judgment to AmEx and dismissed the complaint on the grounds that Gray had waived his rights under the act

Issue: Is AmEx liable to Gray for violating the FCBADecision:

Act states that during the pendency of a disputed billing, the card issuer shall not cause the cardholder's account to be restricted or closed because of the failure of the obligor to pay the amount in disputeRationale of consumer protection legislation is to even out the inequalities that consumers normally bring to the bargain; to allow such protection to be waived by boiler plate language of the contract puts the legislative process to a foolish and unproductive taskOrder of summary judgment and dismissal is hereby vacated

Debit CardsLiability

Check card - another name for a debit cardLiability for a stolen debit card is much greaterTimeline

Report the loss before anyone uses your card, you are not liable for any unauthorized withdrawalsReport the theft within 2 days of discovering it, the bank will make good on all losses above $50If you wait until after 2 days, your bank will only replace stolen funds above $500After 60 days of receipt of your bank statement, all losses are yours: the bank will not repay any stolen fundsIf an unauthorized transfer takes place using just your number, not your card, then you are not liable at all as long as you report the loss within 60 days of receiving the bank statement showing the loss; after 60 days you are liable for the full amount

FeesUnder new rules, banks are not allowed to overdraw an account and charge the fee unless the consumer signs up for an overdraft planConsumers who don't "opt in" to the overdraft plan will not be able to overdraw their account, no matter how desperate they areMerchants can now offer different prices depending on how a consumer pays for a purchase - cash, credit, or debit - but they cannot vary the prices across brands -(MasterCard v. Visa, or different banks)

Credit ReportsAccuracy of Credit Reports

Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions Act (FACTA) and Dodd-Frank regulate credit reportsConsumer reporting agencies are businesses that supply consumer reports to third partiesConsumer reports - any communication about a consumer's creditworthiness, character, general reputation, or lifestyle that is considered as a factor in establishing credit, obtaining insurance, securing a job, acquiring a government license, or for any other legitimate business needUnder the FCRA:

Consumer reporting agency cannot report obsolete informationOrdinary credit info is obsolete after 7 years; bankruptcies after 10 yearIf applying for more than $150,000 of credit or life insurance, or for a job that pays more than $75,000 a year, then there is no time limit

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Investigative reports - discuss character, reputation, or lifestyle; become obsolete in 3 months; cannot be ordered without first informing the consumerAn agency cannot report medical information without the consumer's permissionAn employer cannot request a consumer report of any current or potential employee without the employee's permission; an employer cannot take action because of information in the consumer report without first giving the current or potential employee a copy of the report and a description of the employee's rights under this statuteAnyone who makes an adverse decision against a consumer because of a credit report must reveal the name and address of the reporting agency that supplied the information

An "adverse decision" includes denying credit or charging higher ratesUpon request from a consumer, a reporting agency must disclose all information in his file, the source of the information (except for investigative reports), the name of anyone to whom the report has been sent in the prior year (2 years for employment purposes), and the name of anyone who has requested a report in the prior yearIf a consumer tells an agency that some info in the file is incorrect

The agency must both investigate and forward the data to the information providerinfo provider must investigate and report the results to the agencyIf the data are inaccurate, the info provider must so notify all national credit agenciesConsumer also has the right to give the agency a short report telling his side of the storyAgency must then include consumer's statement with any credit reports it supplies and also, at the consumer's request, send the statement to anyone who has received a report within 6 months (or two years for employment purposes)

Access to Credit Reports and Credit ScoresUnder FACTA, consumers are entitled to one free credit report every year from each of the 3 major reporting agencies: Equifax, Experian, and TransUnionRecommended you check your report every yearIf you find errors, notify the agency in writing and warn it that failing to make corrections is a violation of the lawCredit score (aka FICO score) ranges between 300 and 850Not automatically included as part of your credit report, but now anyone who penalizes you because of your score has to give it to you for free

Identify TheftFACTA created the National Fraud Alert system - permits consumers who fear they may be the victim of identity theft to place an alert in their credit files, warning financial institutions to investigate carefully before issuing any new credit; also requires credit bureaus to share information about identity theftFraud alter doesn't prevent identity theft so many states permit a "security freeze" which prohibits any access to a consumer's credit report

No one, event the consumer, can obtain a credit reportDownside: must pay a fee to thaw the account

Under Gramm-Leach-Bliley Privacy Act of 1999, banks other financial institutions, and consumer reporting agencies must notify a consumer

1. Before disclosing any personal information to a third party2. If there has been unauthorized access to the consumer's sensitive personal information

(company cannot disclose private info if the consumer opts out -that is denies permission)Debt Collection

The Fair Debt Collection Practices Act (FDCPA) - designed to protect consumers from abusive debt collection efforts 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

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that if the debtor disputes the debt (in writing), the collector will cease all collection efforts until it has sent evidence of the debtUnder FDCPA, collectors may not:

Call or write a debtor who has notified the collector in writing that he wishes no further contactCall or write a debtor who is represented by an attorneyCall a debtor before 8am or after 9pmThreaten a debtor or use obscene or abusive languageCall or visit the debtor at work if the consumer's employer prohibits such contactImply that they are attorneys or government representatives when they are not, or use a false nameThreaten to arrest consumers who do not pay their debtsMake other false or deceptive threats - that is, threats that would be illegal if carried out or which the collector has no intention of doing - such as suing the debtor or seizing propertyContact acquaintances of the debtor for any reason other than to locate the debtor (and then only once), orTell acquaintances that the consumer is in debt

In the event of a violation of the FDCPA, debtor is entitled to damages, court costs, and attorney's fees; FTC also has authority to enforce the Act Brown v. Card Service Center

Facts:Card Service Center (CSC) sent Elizabeth Brown a collection letter demanding payment of a delinquent credit card balance of $1,874Letter said: "refusal to cooperate could result in a legal suit ...you have 5 days … could result in our forwarding this account to our attorney with directions to continue collection efforts"Brown didn't contact them within 5 days and CSC did nothing other than send more collection lettersBrown filed suit, alleging that CSC violated the FDCPA; alleged that the letter was deceptive because the company never had any intention of carrying out its threatsDistrict court granted CSC's motion to dismiss; Brown appealed

Issue: Did CSC's letter violate the FDCPA?Argument for Brown:

CSC's letter indicated that there were 2 options: a lawsuit or referral to an attorney; neither happened and CSC knew when it sent the letter that neither would happenLetter was an empty threat - the type of behavior FDCPA prohibits Possible a sophisticated debtor would realize that CSC had no intention of filing, but point of FDCPA is to protect all consumers

Argument for CSC:Letter said "could" not "will"; did not imply that legal action was imminent, only that it was possible

Equal Credit Opportunity ActECOA prohibits any creditor from discriminating against a borrower because of race, color, religion, national origin, sex, marital status, age (as long as the borrower is old enough to enter into a legal contract), or because the borrower is receiving welfareLender must respond to a credit application within 30 days; if a lender rejects an application, it must either tell the applicant why or notify him that he has the right to a written explanation of the reasons for this adverse actionTreadway v. Gateway Chevrolet Oldsmobile, Inc.

Facts:Gateway Chevrolet Oldsmobile, a car dealership, sent an unsolicited letter to Tonja Treadway notifying her that she was "pre-approved" for the financing to purchase a carGateway didn't provide financing itself; instead, it arranged loans through banks or finance companies

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Treadway called to say she was interested in buying a used carDealer got her credit report, and determined she wasn't eligible for financing; not surprising since Gateway bought her name from a list of people who had recently filed for bankruptcyGateway called her and invited her to come to the dealership; told her they had found a bank that would finance her transaction but only if she got new car and had a co-signerGot a new car, had her godmother Pearlie Smith to co-signGateway had an agent deliver papers directly to Smith's house to be signed immediately; if Smith had read them before she signed she would have realized she had committed herself to being the sole purchaser and owner of the car; had no idea until she started receiving bills on the car loanTreadway made 1st payment on behalf of Smith; then both refused to pay: Smith didn't want the car and Treadway because the car was not hersCar was repossessed, but the financing company continued to demand paymentGateway was running a scamTreadway sued, alleging that Gateway had violated the ECOA by not notifying her that it had taken an adverse action against herDistrict court granted Gateway's motion for summary judgment on grounds that Gateway hadn't committed an adverse action under the ECOA; appeal followed

Issue: Did Gateway violate the ECOADecision:

"adverse action" - defined in relevant part by the ECOA as "a denial or revocation of credit" By unilaterally deciding not to send Treadway's application to any lender, Gateway effectively denied credit to TreadwayWhether it's the lend or the dealership that makes the decision, both the action and the outcome are the sameIn both cases, the decision maker

1. Reviews the applicant's credit report to determine whether she is creditworthy2. Makes a determination adverse to the applicant (i.e., that she is not creditworthy)3. Decides not to proceed any further in arranging credit and4. As a result the applicant is not granted credit

Gateway's action constitutes an "adverse action" for purposes of the ECOAConsumer Leasing Act

Does not apply to any lease for more than $50,000 or to the rental of real property - that is, to house or apartment leasesBefore a lease is signed, a lessor must disclose the following in writing:

All required payments, including deposits, down payments, taxes, and license feesThe number and amount of each monthly payment and how payments are calculatedBalloon payments (payments due at the end of the lease)Required insurance paymentsAnnual mileage allowanceThe total amount the consumer will have paid by the end of the leaseAvailable warrantiesMaintenance requirement and a description of the lessor's wear and use standardsPenalties for late paymentsThe consumer's right to purchase the leased property, and at what price,The consumer's right to terminate a lease early, andAny penalties for early termination

Magnuson-Moss Warranty ActDoes not require manufacturers or sellers to provide a warranty on their productsThe 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

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Applies only to written warranties on goods (not services) sold to consumersDoes cover sales by catalog or on the InternetRequired disclosure includes the following:

The name and address of the person the consumer should contact to obtain warranty serviceThe parts that are covered and those that are notWhat services the warrantor will provide, at whose expense, and for what period of time, andA statement of what the consumer must do and what expenses he must pay

Full warranty - the warrantor must promise to fix a defective product for a reasonable time without charge; if after a reasonable number of efforts to fix the defective productive, it still does not work, the consumer must have the right to a refund or a replacement without charge; but the warrantor is not required to cover damage cause by the consumer's unreasonable use

Consumer Product SafetyGoal of Consumer Product Safety Act of 1972 (CPSA) was to prevent injuries in the first placeCreated the Consumer Product Safety Commission (CPSC) to evaluate consumer products and develop safety standardsManufacturers must report all potentially hazardous product defects within 24 hours of discoveryCommission can impose civil and criminal penalties on those who violate its standards

Chapter ConclusionVirtually no one will go through life without reading an advertisement, ordering online, borrowing money, acquiring a credit report, or using a consumer product

CHAPTER 43 REAL PROPERTY AND LANDLORD-TENANT LAW 

Nature of Real PropertyProperty falls into 3 categories: real, personal, and intellectualReal property:

Land Most common and important form of real propertyUsually includes anything underground (subsurface right), and some amount of airspace above land (air rights)

BuildingsHouses, office buildings, apartment complexes, and factories

Plant lifeWhether the plants are naturally occurring, like trees, or cultivated cropsWhen a landowner sells his property, plant life is automatically included in the sale unless the parties agree otherwiseA landowner may also sell the plant life separately if he wishesSale of the plant life alone, without the land, is a sale of goods

FixturesGoods that have become attached to real propertyEx: furnace and heating ducts were goods when they were manufactured and when they were sold to the builder, but when the builder attached them to the house, the items became fixtures (neither the refrigerator nor the grand piano is a fixture)An object is a fixture if a reasonable person would consider the item to be a permanent party 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

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Adaptation: something that's made or adapted especially for attachment to the particular property is probably a fixture, such as custom-made bookshelves fitted in a libraryOther manifestations of permanence: if the owner clearly intends the item to remain permanently, it's probably a fixture

Freeman v. BarrsFacts:

Mary Ann Barrs paid $3.5 million to Francis Freeman for 4,000 acres of ranch lands, including a covered "pole-barn" which had open sides, a large cattle scale, and an enclosed vet's officeParties used a form contract, which stated that all fixtures were included with the saleDocument offered space for the parties to specify items that were included or excluded with the sale, but neither party listed the cattle scale as either in or out of the dealGot into a fight after the agreement went throughTrial judge grilled numerous witnesses and ultimately weighed in on the side of Barrs, declaring the scale a fixture that belonged to the real estate; Freeman appealed

Issue: Was the cattle scale a fixture?Decision:

The person who designed the scale testified the scale was designed to be portable and 70% of the scales he sold were installed in the present mannerWould only take about 1hour and 15 minutes to move scaleCharacterization of an item as a fixture depends upon the finding of 3 elements:

Annexation to the realtyAdaptation to the use to which the realty is devotedIntent of the annexor that the object become a permanent accession to the freehold

Court decided the scale was a fixture; that, therefore, the sale of the real estate on which it was situate included the sale of the scale; permanency of installation is emphasized by the fact the facility is covered and has a vet office in which the printer for the scale may be operated; scale was put in place to facilitate the cattle operation on the premisesAffirmed.

Estates in Real PropertyFee simple absolute - full ownership privileges in a propertyDifferent rights someone can hold in real property are known as estates or interests

Concurrent EstatesTwo or more people owning property at the same timeMost common forms: tenancy in common, joint tenancy, and tenancy by the entirety

Tenancy in commonTwo or more people holding equal interest in a property, but with no right of survivorshipConvey a deed - transfer the deedCan be created in a willThe "default setting" when multiple people acquire propertyThey own an equal interest in the entire property, don't own a particular section of the propertyAny co-tenant may convey her interest in the property to another person

PartitionDivision of the property among the co-tenantsAny co-tenant is entitled to demand partition of the propertyIf various co-tenants cannot agree on fair division, can request a court to do itAll co-tenants have an absolute right to partitionCourt normally attempt a partition by kind - it actually divides the land equally among the co-tenantsIf no way to fairly divide the property, the court will order the real estate sold and the proceeds divided equally

Joint Tenancy

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Two or more people holding equal interest in a property, with the right of survivorshipWhen one joint tenant dies, his interest in the property passes to the surviving joint tenantsJoint tenants can convey their interest during their lifetime (but not by will)

Jackson v. Estate of GreenFacts:

Green and Jackson owned land as joint tenantsGreen filed a petition asking a court to partition the parcels, but died while partition was still pendingLower courts found that because the partition was not complete at the time of Green's death, the land reverted to JacksonGreen's estate appealed

Issue: does filing for the partition of a joint tenancy terminate survivorship rights?Decision:

Agree with Court of Appeals that defendant's interest in the parcel of land automatically reverted to plaintiff when defendant died; defendant's estate has no interestA party can sever a joint tenancy by compelling a partition; until an order or partition has been entered, however a partition has not been compelled and, thus, the joint tenancy has not been severedFiling of the partition action did not sever the joint tenancy because a order effectuating a partition had not entered at the time of defendant's death; regardles whether defendant's partition action survived his death under the survival statute, his interest in the parcel of land did notAffirmed

Tenancy by the EntiretyThe husband and wife each own the entire property, and they both have a right of survivorshipNeither party has a right to convey his or her interestIf the parties wish to sell their interest, they must do so togetherNo creditor may seize the property based on a debt incurred by only one spouseDivorce terminates a tenancy by the entirety and leaves the two parties as tenants in common

Community propertyAllows the husband and wife to maintain separate ownership of assets they bring to the marriage or inherit

Those assets are called separate property; remain private property of each spouse during the marriage

Income or assets that either party earns during the marriage are considered community property, which must be equally shared during the marriage, regardless of who earns itNeither party may convey community property without the consent of the otherWhen a spouse dies, 1/2 of the community property goes to the surviving spouse, and the other half goes to the heirs of the deceased

Future InterestsLife estate - ownership of property for the lifetime of a particular person

ReversionThe right of an owner (or her heirs) to property upon the death of a life tenantThe owner may convey his reversion at any time; is allowed to sell the land, but the buyer must bide his time until the life tenant's death

RemainderSame value as a reversion, but when the life tenant dies, the property goes to a named 3rd person, not the original owner

Nonpossessory InterestsInterests that never involve possession

Easements

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The right to enter land belonging to another and make limited use of it, without taking anything away2 kinds of easements:

Easement appurtenant - benefits its owner in the use of another parcel of land; runs with the land (if the owner of the dominant tenement sells her land, the buyers acquires the easement as well

Dominant tenement - the property that benefits from the easementServient tenement - the land that is burdened by the easement

Easement in gross - benefits its owner, but not in the use of other landMay be sold to another

Creation of EasementsGrant or Reservation

Grant occurs when a landowner expressly intends to convey an easement to someone elseReservation occurs when an owner sells land but keeps some right to enter the property

Implication or necessityAn easement by implication arises when an owner subdivides land in a way that clearly implies the creation of an easement in favor of the new parcelsEasement by necessity - when the dominant tenement absolutely must make use of other property

PrescriptionMay arise when someone makes use of property belonging to another, if his use is:

Open and notoriousAdverse to the owners, andContinuous and uninterrupted for the number of years required by local statute

Must satisfy each elementProfit

The right to enter land belonging to another and take something from itLicense

The right to enter land belonging to another temporarilyi.e. a ticket to a game lets your enter the premises temporarily

MortgageA security interest in real propertyMortgagor - an owner who gives a security interest in property in order to obtain a loanMortgagee - the party acquiring a security interest in propertyLien - the right to foreclose on the property if the mortgagor fails to pay back the money borrowed

Adverse PossessionAllows someone to take title to land if she meets certain testsIn most states, to gain ownership of land by adverse possession, the user must prove:Entry and exclusive possessionOpen and notorious possessionA claim adverse to the owners, andContinuous possession for a statutory period

Entry and Exclusive PossessionUser must take physical possession of the land and must be the only one to do soIf the owner is still occupying the land, or if other members of the public share its use, there can be no adverse possession

Open and notorious possessionThe user's presence must be visible and generally known in the area, so that the owner is on notice that his title is contested; ensures that the owner can protect his property by ejecting the userSomeone making secret use of the land gives the owner no opportunity to do this, and hence acquires no rights in the land

A claim adverse to the owner

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User must clearly assert that the land is hisDoesn't need to register a deed or take other legal steps, but he must act as though he is the sole ownerIf the user occupies the land with the owner's permission, there is no adverse claim and the user acquires no rights in the propertyTo succeed, the user must protect his possession of the land against all others the way any normal landowner wouldMany states focus only on the adverse acts of the user: it is sufficient if his conduct indicates he is the sold owner, regardless of what he thinks

Continuous possession for the statutory periodPrescribe a period of years for continuous use of the landMost states now demand 10 yearsRewards those who make use of landThe use must be continuousTacking - permits the user to add on to her years of occupancy any years certain predecessors were in possession; predecessor must have been in privity with the current user, meaning there was some legal relationship

Ray v. Beacon Hudson Mountain Corp.Facts:

In 1931 Rose Ray bought a cottage in a mountaintop resort town in the Adirondacks, at the same time agreeing to rent the land on which the structure stoodLong-term lease required her to pay the real estate taxes and provided that when the tenancy ended, the landlord would buy back the cottage at fair market valueIn 1960, the landlord terminated the lease of everyone in the town, so all the residents packed up and left; never saw a penny when she died in 1962Next year, Mt. Beacon Incline Lands Inc. bought all rights to the abandoned resortThe son and daughter-in-law of Ray reenterd the cottage and used it one month/year every summer from 1963-1988; paid taxes, insured property, installed utilties and posted "no trespassing signs"In 1978, Beacon Hudson bought the resort in a tax foreclosure saleIn 1988 Rays filed suit claiming title to the cottage by adverse possession; Beacon Hudson counterclaimed, seeking to eject the Rays; trial court ruled for the couple, appellate court reversed stating the couple had been absent too frequently to achieve adverse possession

Issue: Did the Rays acquire title by adverse possession?Decision:

Requirement of continuous possession is satisfied when the adverse claimaint's acts of possessing the property are consistent with acts of possession that ordinary owners of like properties would undertakePlaintiff's installation of utilities and overall preservation of the cotagge for the duration of the statutory period demonstrates continuous actual occupration of land by improvementAppellate court is reverse and Rays obtain title by adverse possession

Land Use RegulationNuisance law

Nuisance - an unprivileged interference with a person's use and enjoyment of her propertyCourts typically balance the utility of the act that is causing the problem against the harm done to neighboring property ownersAbatement - an order requiring the homeowner to eliminate the nuisance

ZoningZoning status are state laws that permit local communities to regulate building and land useControl many aspects of land developmentVariance - an exception granted for special reasons unique to the property

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Whether a board will grant a variance generally depends upon the type of the proposed building, the nature of the community, the reason the owner claims he is harmed by the ordinance, and the reaction of neighbors

Eminent DomainThe power of the government to take private property for public useTakings Clause - private property cannot be taken for public use without just compensationA "fair price" generally means the reasonable market value of the landIf the property owner refuses the government's offer, the government will file suit seeking condemnation of the land, aka a court order specifying what compensation is just and awarding title to the government

Landlord-Tenant LawLandlord - the owner of a freehold estate who allows another person temporarily to live on his propertyTenant - a person given temporary possession of the landlord's propertyA freehold estate is the right to possess real property and use it in any lawful mannerWhen an owner of a freehold estate allows another person temporary, exclusive possession of the property, the parties have created a landlord-tenant relationship

Three Legal Areas CombinedLease - an agreement in which an owner gives a tenant the right to use propertyReversionary interest - the right to possess the property when the lease ends

LeaseThe statute of frauds generally requires that a lease be in writingAt minimum, must state the names of the parties, the premises being leased, the duration of the agreement, and the rentCovenant - a promise by either the landlord or the tenant to do something or refrain from doing somethingCondition - allows for a landlord to evict a tenant if there is a violation

Types of Tenancy4 types of tenancy: tenancy for years, a periodic tenancy, a tenancy at will, and a tenancy at sufferanceDifference is in how each terminates

Tenancy for yearsAny lease for a stated, fixed period Even if its for a few monthsTerminates automatically when the agreed period ends

Periodic tenancyA lease for a fixed period, automatically renewable unless terminatedExample: Rent an apartment month to monthCreate a periodic tenancy if, when a tenancy for years expires, the tenant continues to pay rent and the landlord accepts itFor a commercial property, new periodic tenancy is for the same period as the old tenancy for years, up to a maximum of one yearResidential property renewed for a month

Tenancy at willA tenancy with no fixed duration, which may be terminated by either party at any timeUnusual tendenciesAgreement is vague, with no specified rental period and with payment, perhaps, to be made in kind

Tenancy at sufferanceA tenancy that exists without the permission of the landlord, after the expiration of a true tenancyNot a true tenancyLandlord can evict the tenant or forcing the tenant to pay a use and occupancy fee for as long as she stays

Elwell v. MinorFacts:

Elwell orally agreed to rent an apartment in CT to Lucille Minor on a month-to-month basis

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Her rent increased; she paid the original amount explaining she did not want to pay the increased rent this month but would pay the increase in later monthsElwell rejected the paymentMinor tendered the check a second time and Elwell returned it againElwell told Minor to pay $650 or vacate; she did neither so Elwell began eviction proceedings (called "summary process") by serving a Notice to Quit for nonpayment of rentAfter additional negotiations failed, Elwell served a 2nd notice; at trial Minor argued that nonpayment of rent was an improper grounds for evicting a tenant at sufferance

Issue: May a landlord evict a tenant at sufferance for non-payment of rent?Decision:

Because Minor remained in possession of the premises without a new monthly contract, she should be treated as a holdover occupying the apartment without the legal right to do so (aka a tenant at sufferance)In this case, the defendant was not a tenant at will, because such a tenancy exists only when the occupation of the property is with the landlord's consent, continuing during the tenancyOnce the lease terminated, Minor became a tenant at sufferanceNonpayment of rent is not a proper ground for the eviction of a tenant at sufferance because a tenant at sufferance is not required to pay rent, but only use and occupancyWhen 2 parties enter into a month-to-month lease, they don't ordinarily designate a definite date when the lease, by its own terms, will expireOnce the agreement expires by operation of law, the tenant's obligation to pay rent transforms into an obligation of the premises; without an obligation to pay rent there can be no summary process for nonpayment of rentProper statutory basis for pursuing summary process against a tenant who failed to pay a reasonable su for use and occupancy would be that the tenant originally had the right or privilege has terminated ; the second notice to quit cites improper grounds for the eviction of a tenant at sufferance; notice to quit is defective and deprives this court of subject matter jurisdiction in this summary process actionAction is dismissed

Landlord's DutiesDuty to Deliver Possession

The landlord's first important duty is to deliver possession of the premises at the beginning of the tenancy, that is, to make the rented space available to the tenantThe "English rule" - obligates the landlord to remove the previous tenant in time for the new tenant to take possessionsNew tenant has 2 alternative remedies:

May terminate the lease and sue the landlord for costs she incurs obtaining other accommodations, orMay affirm the lease, refuse to pay rent for the period in which she cannot take possession, sue for the cost of other accommodations, and then take possession when the old tenant is finally evicted

The "American Rule" - more favorable to the landlordMinority rule in this countryHolds that the landlord has no duty to deliver actual possession of the premisesIf the previous tenant remains in possession, the landlord has not breached the leaseNew tenant generally has the power to act as a landlord toward the old tenant; new tenant may evict the old tenant and recover damages caused by her delay in leavingAlternatively, the new tenant may treat the holdover as a tenant at will for a new rental period and may charge the normal rent for that period

Quiet EnjoymentAll tenants are entitled to quiet enjoyment of the premises, meaning the right to use the property without the interference of the landlordEviction - an act that forces a tenant to abandon the property

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Law implies the right of quiet enjoyment even if the lease has no covenantTwo types of eviction: actual and constructive

Actual EvictionIf a landlord prevents the tenant from possessing the premises, he has actually evicted herIf a landlord simply waits until his tenants leave, changes the locks, he has breached their right of quiet enjoyment

He would be liable for all expenses they suffer; may be liable for punitive damagesEven a partial eviction is an interference with quiet enjoyment

Constructive evictionIf a landlord substantially interferes with the tenant's use and enjoyment of the premises, he has constructively evicted herExample: heating system fails during cold winter, landlord says too busy to fix so tenants move out; liable for all expenses they sufferTo claim a constructive eviction,

The tenant must vacate the premisesMust also prove that the interference was sufficiently serious and lasted long enough that she was forced to move out

Other interferenceA landlord's conduct may interfere with quiet enjoyment event when it's not so harmful as to force a constructive eviction

Duty to Maintain PremisesIn most states, a landlord has a duty to deliver the premises in a habitable condition and a continuing duty to maintain the habitable conditionLandlord's duty to maintain the property focuses on whether the property meets a particular legal standard

LeaseGenerally obligates the landlord to maintain the exterior of any buildings and the common areas

Building codesMandate minimum standards for commercial and/or residential property

Implied warranty of habitabilityRequires that a landlord meet all standards set by the local building code or that the premises be fit for human habitationCourt considers the severity of the problems and their durationRent abatement - a reduction in the rent owed

Duty to Return Security DepositLandlord must either return the security deposit soon after the tenant has moved out or notify the tenant of the damage and the cost of the repairsLandlords are often obligated to credit tenants with interest earned on the deposit

Mishkin v. YoungFacts:

Colorado statute required a landlord either to return a security deposit or provide an accounting of why money was being withheld; had to do so within one month of the tenant's surrender of the property or up to 60 days if the lease permittedIf the landlord failed to refund the money, the tenant, after giving 7 days' notice, could sue for treble damages; landlord could avoid the treble damages by refunding the deposit within those 7 daysMishkin leased an apartment from Young paying a security deposit of $1,625; lease state that the deposit would be returned no later than 45 days after the tenant moved out48 days after leaving, Mishkin sent a demand for the deposit, notifying Young that in 7 days he would sue for treble damages

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6 days later, Young gave Mishkin a statement detailing $1,574.60 worth of property damage along with a check for $50.40Mishkin sued; trial court ruled that Young was entitled to withhold the money because of the damages; Mishkin appealed; appellate court ruled that the CO statute required the landlord to return the full deposit within the 7 day period; Young appealed

Issue: May a landlord avoid the treble damages by accounting for the security deposit within 7 days of the tenant's notice to sue?Decision:

Landlord forfeits all of the deposit if he fails to return the money or account for it within the statutory periodLandlord may avoid treble damages only by returning the entire security deposit during the 7 days after a tenant's demand notice

Does not give landlords a second chance to account for the deposit; full money actually belongs to the tenant

AffirmedFinal Word on security deposits

In a commercial lease, the tenant may have less statutory protection but more bargaining powerTenant's Duties

Duty to Pay RentRent - compensation paid by a tenant to a landlordEscalator clauses - a lease clause allowing the landlord to raise the rent for specified reasons

i.e. a tax escalatorLandlord's Remedies for Nonpayment of Rent

Entitled to apply the security deposit to the unpaid rentMay sue the tenant for nonpayment, demanding the unpaid sums, cost of collection, and interestMay evict a tenant who has failed to payLandlord must serve a termination notice on the tenant and wait for a court hearingAt the hearing, must prove that the tenant has failed to pay rent on time; if the tenant has no excuse, court grants an order evicting him; order authorizes sheriff to remove the tenant's goods and place them in storage at tenant's expense

Duty to MitigateMitigate damages - keep its losses to a minimum by promptly seeking another tenant

Duty to Use Premises for Proper PurposeTenant who engages in illegal acts on the leased property is subject to eviction, regardless of whether the lease mentions such conduct

Duty Not to Damage PremisesA tenant is liable to the landlord for any significant damage he causes to the property; not liable for normal wear and tearLandlord can collect on cost of repairs , either by using the security deposit or by suing; can seek to evict a tenant for serious damage to the propertyTenant is permitted to make reasonable changes in the leased property so that he can use it as intendedFixture - an item of personal property that is permanently attached to real estateIn commercial leases, it's common for tenants to install expensive equipment as part of their business - trade fixtures

Duty to not disturb other tenantsMay evict a tenant who unreasonably disturbs othersThe test is reasonableness

InjuriesTenant's Liability

A tenant is generally liable for injuries occurring within the premises she is leasing, whether that is an apartment, a store, or otherwise

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Landlord's liabilityCommon law rules

Latent defectsIf the landlord knows of a dangerous condition on the property and realizes the tenant will not notice it, the landlord is liable for any injuries

Common areasUsually responsible for maintaining the common areas and along with this obligation may go liability for torts

Negligent repairsEven in areas where the landlord has no duty to make repairs, if he volunteers to do so and does the work badly, he is responsible for resulting harm

Public useIf meant for public purpose, landlord is generally obligated to repair any dangerous defects, although the tenant is probably liable as wellTo ensure that the general public can safely visit commercial establishments

Modern TrendIn many states, a landlord must use reasonable care to maintain safe premises and is liable for foreseeable harmSome imply a warranty of habitability, which mandates reasonable safe living conditions

Exculpatory clausesA lease clause that relieves a landlord of liability for injuriesGenerally void in residential leases

Chapter ConclusionReal property law is ancient but forceful. Although real property today is not the dominant source of wealth that it was in medieval England, it is still the greatest asset that most people will ever possess - and is worth understanding.When property is rented, a special relationship exists between landlord and tenant. Each has numerous obligations to the other. The current trend is clearly for expanded landlord liability, but how far that will continue is impossible to divine.

CHAPTER 44 PERSONAL PROPERTY AND BAILMENT1119 - 1133 Introduction

Personal property - all tangible property other than real property(real property - land and things firmly attached to it, such as buildings, crops, and minerals)All other physical objects are personal property - a bus, toothbrush, a share of stock

GiftsGift - a voluntary transfer of property from one person to another, without considerationDonor - person who gives property awayDonee - a person who receives a gift of propertyA gift involves 3 elements:

The donor intends to transfer ownership of the property to the donee immediatelyThe donor delivers the property to the doneeThe donee accepts the property

If all 3 elements are met, the donee becomes the legal owner of the propertyIntention to Transfer Ownership

Donor must intend to transfer ownership to the property right away, immediately giving up all control of the item2 important parts of this element:

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Donor's intention must be to transfer ownership: give title to the doneeDonor must also intend the property to transfer immediately

(promises about future behavior are governed by contract law, and a contract is unenforceable without consideration)

Revocable gift - governed by a special rule, and it not actually a giftExample: I'll give you this but if you act stupid, I'm taking it back

DeliveryPhysical Delivery

The donor must deliver the property to the doneeGenerally, involves physical delivery or by saying "I want you to have this forever"

Constructive deliveryA donor makes constructive delivery by transferring ownership without a physical deliveryOnly allowed by courts when physical delivery is impossible or extremely inconvenient

Delivery to an agentCan deliver the property to an agent, either someone working for him or for the donee

Property already in donee's possessionNo delivery is required and the donee need only demonstrate that the donor intended to transfer present ownership

Inter Vivos Gifts and Gifts Causa MortisInter vivos - a gift made during the donor's life, with no fear of impending death

It's absolute; both are healthyGift causa mortis - a gift made in contemplation of approaching death

Gift is valid if the donor dies as expected, but it is revoked if he recoversIt is a revocable gift; since a gift causa mortis is conditional (upon the donor's death), the donor has the right to revoke it at any time before he diesIf the donor recovers and does not die as expected, the gift is automatically revoked

AcceptanceDonee must accept the giftHer repudiation of the donor's offer means there is no gift, and she has no rights in the property

Albinger v. HarrisFacts:

Michelle Harris and Michael Albinger lived together, on and off, for 3 years; relationship involved alcohol abuse and violence Albinger gave Harris a $29,000 engagement ring; the couple broke off their wedding plans because of emotional and physical turmoilHarris returned the ring, they reconciled and resumed their marriage plans, and Albinger gave his fiancee the ring again; same thing happened repeatedly for 3 years; each time Harris gave the ring back and each time they made up, he gave it back to herOn one occasion, Albinger held a knife over Harris as she lay in bed, threatening to chop off her finger if she didn't remove the ringCriminal charges were brought (he beat her and forcibly removed the ring); ended their affair and Harris moved to Kentucky and took the ringAlbinger sued for the value of the ringer; trial court found that the ring was a conditional gift, made in contemplation of marriage, and ordered Harris to pay its full value; she appealedSupreme Court had to decide, in a case of first impression, whether an engagement ring was given in contemplation of marriage

Issue: Who owns the ring?Argument for Harris:

Problem with calling the ring a "conditional gift" is that there is no such thing; elements of a gift are intent, delivery, and acceptance, and Harris has to prove all three

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A gift is not a contract, nor is it a loanOnce a gift is accepted, the donor has no more rights in the property and may not demand its return

Argument for Albinger:All parties understand if engagement is called off: the ring is returnedHarris always returned the ring until greed got the best of her and she fled to Kentucky

Found Property

The primary goal of the common law has been to get found property back to its proper owner, if possibleThe finder must make a good faith effort to locate the owner of the property and return the goods to himA second policy has been to reward the finder if no owner can be located4 kinds of found property:

Abandoned propertySomething the owner has knowingly discarded because she no longer wants itGenerally finder is allowed to keep itBut because the owner loses all rights in abandoned property, a court never presumes abandonmentFinder must prove that the owner intended to relinquish all rights

Lost propertySomething accidentally given upFinder has rights superior to all the world except the true ownerIf true owner doesn't come forward, finders keepersBut if the finder has discovered the item on land belonging to another, the landowner is probably entitled to keep it

Mislaid property Something the owner has intentionally placed somewhere and then forgottenGenerally, the finder gets no rights in property that has simply been mislaidIf the true owner cannot be located, the mislaid item belongs to the owner of the premises where the item was found

Treasure troveCoins or currency concealed by an owner so long ago that it's likely the owner has diedFinder can generally keep treasure trove

Finding statutes - laws that govern found property; aka estray statutes Armorie v. Delamirie (1722)

Facts:Armorie was one of many English chimney sweeps forced to climb the narrow flues and do the cleaningArmorie found a jeweled ring; took it to a local goldsmithThe goldsmith's apprentice, removed the jewels and pretended to weigh it; gave Armorie a crap offer; Armorie refused the offer and demanded the ring be returned; apprentice gave him the ring but without the jewels

Issue: Did the chimney sweep have a legal right to retain possession of the found jewels?Decision:

The finder of a jewel, though he does not by such finding acquire an absolute property or ownership, has such a property as will enable him to keep it against all but the rightful ownerAs to the value of the jewel, the Chief Justice directed the jury that unless the defendant did produce the jewel, and shew it not to be of the finest water, they should presume the strongest against him, and make the value of the best jewels the measure of their damages: which they accordingly did

AccessionOccurs when one person uses labor, materials, or both to add value to personal property belonging to another personGenerally occurs by agreement

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Sometimes one party makes accessions without agreement; if the improvements can be "undone" without damage to the property, then the improver must do that

Wrongful accessionsIf the improver knows he is making accessions without authority, the owner may generally take the improved property without paying for the work done

Mistaken accessionsIf the improver mistakenly believes he is entitled to add accessions, the owner probably has to pay for the increased value

BailmentBailment - the 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 goodsBailee - one in possession of goods

Example: give your suitcases to airline, you are the bailor and the airline is the bailee Parties generally create a bailment by agreementInvoluntary bailment - aka a constructive, a bailment that occurs without an agreement between the bailor and bailee

Ex: find a wristwatch in your house that you know belongs to a friendControl

To create a bailment, the bailee must assume physical control of an item with intent to possessBailee may be liable for loss or damage to the property, and so it is not fair to hold him liable unless he has taken physical control of the goods, intending to posses them

Rights of the BaileeThe bailee's primary right is possession of the propertyAnyone who interferes with the bailee's rightful possession is liable to herEven a bailor is liable if he wrongfully takes back property from a bailee

Bailor must abide by the agreementThe bailee is typically, though not always, permitted to use the propertySome bailees have no authority to use the goods

Using a storage unitDuties of the Bailee

The bailee is strictly liable to redeliver the goods on time to the bailor, or to whomever the bailor designatesStrict liability means there are virtually no exceptions

Due careBailee is obligated to exercise due careLevel of care required depends upon who receives the benefit of the bailment 3 possibilities:

Sale benefit of baileeIf the bailment is for the sole benefit of the bailee, the bailee is required to use extraordinary care with the property The bailor loans something for free to the baileeSince the bailee is paying nothing for the use of the goods, most courts consider her the only one to benefit from the bailment

Mutual benefitThe bailee must use ordinary care with the property

Sole benefit of bailorWhen the bailment benefits only the bailor, the bailee must use only slight careThis kind of bailment is called gratuitous bailment, and the bailee is liable only for gross negligence

Burden of proof

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In an ordinary negligence case, the plaintiff has the burden of proof to demonstrate that the defendant was negligent and cause the harm allegedIn bailment cases, the burden of proof is reversedOnce the bailor has proven the existence of a bailment and loss or harm to the goods, a presumption of negligence arises, and the burden shifts to the bailee to prove adequate care

Johnson v. WeedmanFacts:

Johnson left his horse with Weedman, paying him to board and feed the animalJohnson did not grant Weedman permission to ride the horse, but Weedman took it out for a 15 mile ride; later that day the horse died; trial court found that Weedman had not abused the animal and that the ride had not caused the horse's death Court did not grant damages to Johnson and Johnson appealed

Issue: Should Weedman payArgument for Johnson:

Weedman was in possession only to feed him and see to his basic needsMade personal use of personal property that was in no way necessaryClient must be compensated

Argument for Weedman:Had a legal right to possession of the horseRiding the horse was not a substantial abuse of his rights as bailee; horse was returned in good conditionDeath of horse was coincidental

Exculpatory ClausesA contract clause that attempts to relieve one of the parties from future liabilityValidity of clause depends on several factors:

If the bailor is a corporation and it has bargaining power roughly equal to the bailee's, a court will probably enforce an exculpatory clause

Generally unenforceable if it attempts to exclude an intentional tort or reckless behaviorIf the bailor is a consumer, the clause stands on shaky ground because judges generally presume the parties have unequal bargaining power

Tannebaum v. New York Dry Cleaning Inc.Facts:

Tannenbaum picked up his $160 shirt at the dry cleaners, he found it badly torn; he sued claiming negligence; cleaners denied causing the tear, additionally the cleaner claimed that even if the company damaged the shirt, an exculpatory clause on the back of the ticket limited its liability to 10 times the cleaning fee of $2 or $20

Issues: Was the cleaner negligent? If so, did the exculpatory clause limit the company's liability?Decision:

Not reasonable he should recover only $20 for destruction of $160 shirtCase is one of bailment for hireDefendant denied that the shirt had been damaged while in its care, but did not offer, in the alternative any explanation negating the presumption of negligence; accordingly liable for negligence, unless its disclaimer is effectiveLimitation clause very difficult to seeCourt finds that claimaint was not aware of, and did not assent to be bound by the limitation clauseClaimaint is awarded judgment in the amount of $160 plus interest and costs

Rights and Duties of the BailorThe bailor's rights and duties are the reverse of the bailee'sBailor is entitled to the return of his property on the agreed-upon dateHe is also entitled to receive the property in good condition and to recover damages for harm to the property if the bailee failed to use adequate care

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Liability for defectsBailor is potentially liable for known or even unknown defects in the propertyIf the bailment is for the sole benefit of the bailee, the bailor must notify the bailee of any known defectsIn a mutual-benefit bailment, the bailor is liable not only for known defects but also or unknown defects that the bailor could have discovered with reasonable diligenceIf the bailor is in the business of renting property, the bailment is probably subject to implied warranties (exist whether the parties say anything about them or not)

Common carriers and contract carrierCommon carrier - a company that transports goods and makes its services regularly available to the general public

Strictly liable for harm to the bailor's goodsBailor needs only to establish that it delivered property to the carrier in good condition and that the cargo arrived damaged; carrier then liable unless it can show that it was not negligent and that the los was caused by an act of God, an act of a public enemy, an act of the bailor itself an act of public authority, or the inherent nature of the goods - defenses are difficult to prove, a common carrier is liable for harm to the propertyAllowed to limit its liability by contract

A carrier is a company that transports goods for others; it’s a bailee of every shipment entrusted to itA contract carrier does not make its services available to the general public but engages in continuing agreements with particular customers

Does not incur strict liabilityCan escape liability by demonstrating that it exercised due care of the property

InnkeepersHotels, motels, and inns frequently act as bailees of their guests' propertyMost states have special innkeeper statutes that regulate liability

Some impose absolute limit on a hotel's liability; others require guests to leave valuables in the inn's safe deposit box

GNOC Corp. v. PowersFacts:

Powers liked to wager; he and a friend went to Hilton Casino in Atlantic City; his 4th visit to hotel; clearly marked signs that said hotel was not responsible for valuables or other property left in roomPowers won $76,000; placed his cash, chips, and a money clip on the dresser; at 4:19am the front desk issued a second key to Power's room to an unknown person who stole his stuffPowers ended up $25,000 in debt to the casino, and when he refused to pay, the hotel suedPowers claimed that the Hilton owed him $76,000 for the stolen merchandise; trial judge ruled in favor of the Hilton; Powers appealed

Issue: Did the innkeeper statute protect the hotel?Decision:

Defendant: casino chips are not specifically enumerated in the innkeeper statute and are not items of value as they are merely an accounting mechanism to evidence a debt owed by the casino does not apply to them; asserts that the chips do not "belong to guests"But the list is not exhaustiveHilton complied with the statutory notice requirementsAffirmed

CHAPTER 45 PLANNING FOR THE FUTURE: WILLS, TRUSTS, AND INSURANCE 1140 - 1162

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Introduction to Estate Planning

DefinitionsEstate planning - the process of giving away property after (or in anticipation of) deathEstate - the legal entity that holds title to assets after the owner dies and before the property is distributedDecedent - the person who has diedTestator or testatrix - someone who has signed a valid willIntestate - to die without a willHeir - someone who inherits from a decedent who died intestateDevisee - someone who inherits under a willProbate - the process of carrying out the terms of a willExecutor or executrix - a personal representative chosen by the decedent to carry out the terms of the willAdministrator or administratrix - a 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 trustDonor - someone who makes a gift or creates a trust

Purpose

Estate planning has two primary goals To ensure that property is distributed as the owner desires, andTo minimize estate taxes

Probate lawOnly the states have probate codes to regulate the creation and implementation of wills and trustCodes vary from state to state

WillsA will is a legal document that disposes of the testator's property after deathCan be revoked or altered at any time until deathShould have a will to:

Ensure that their assets are distributed in accordance with their wishesSelect a personal representative to oversee the estate; if the decedent does not name an executor in a will; the court will appoint an administratorAvoid unnecessary expensesProvide guardians for minor children

Requirements for a valid willGenerally speaking, a person may leave his assets to whomever he wantsHowever, the testatrix must be:

Of legal ageOf sound mind: understand what a will is, more or less what she owns, who her relatives are, and how she is disposing of her propertyActing without undue influence - means that one person has enough power over another to force him to do something against his free will

Legal technicalitiesMust be in writingTestator must sign it or direct someone else to sign it for him, if he's too weakGenerally, two witnesses must also sign the willA witness may not inherit under a will

Holographic WillA will that is handwritten signed by the testator, but not witnessedMust be written in a testor's own handwriting - it cannot by typed

Nuncupative willAn oral will

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To be valid, testatrix must know she is dying, there must be 3 witnesses, and these witnesses must know that they are listening to her willWork only for personal property, not for real estate

Spouse's shareForced share - the percentage of a decedent's estate that spouse is entitled to claim under state law; aka statutory shareIn community property states, a spouse can override the will and claim one-half of all marital property acquired during the marriage, except property that the testator inherited or received as a giftIf a couple has been married for many years and has substantial assets, it can very difficult to sort out what is and is not community property

Children's shareParents are not required to leave assets to their childrenThey may disinherit their children for any reasonsPretermitted child - a child who is left nothing under the parent's willLaw presumes pretermitted child was omitted by accident unless the parent clearly indicates in the will that he has omitted the child on purpose; must either leave her some nominal amount, such as $1, or specifically write in the will the omission was intentionalIf a pretermitted child is left out by accident, is generally entitled to the same share she would have received if her parent had died intestate - without a willIssue - a person's direct descendants such as children and grandchildrenPer stirpes - each branch of the family receives an equal sharePer capita - each heir receives the same amount

In Re Estate of Josiah James Treloar, Jr.Facts:

His first will left his estate to his wife unless she died before he did, in which case one piece of land was to go to his daughter Evelyn, another to his son Rodney, and the rest of his estate was to be divided equally among Evelyn, Rodney, and another daughter BeverlyAfter Evelyn died, Josiah executed a new will; gave his lawyer a copy of the old will with handwritten changes including her name crossed out; new will left the estate to Rodney and Beverly equally; Evelyn's children and her husband, Leon, got nothing although Leon was named as executor - referred to him as my son-in-lawUnder NH law, all issue (including children and grandchildren) can qualify as pretermitted heirs (forgotten in the will); they are therefore entitled to a share of his estateJosiah's attorney was serving as executor (not Leon); when he refused to pay the children, they sued

Issue: are Evenlyen's children entitled to a share of Josiah's estate?Decision:

Purpose is to prevent a mistake or unintended failure by the testator to remember the natural object of his or her bountyTo be a pretermitted heir, the child must not be named in the will, or be a devisee or legatee under the willThe executor asserts that, although the will names neither Evelyn nor her children, there are sufficient indirect reference to Evenly to satisfy the statuteDisagree with the executor that we must read the wills together; new will stands on its ownUsed "son in law" to identify executor not in a bequestEvelyn's children are pretermitted heirs

Amending a WillA testator can generally revoke or alter a will at any time prior to deathRevoke a will by destroying it, putting an x through it, writing "revoked", signing a new will, execute an amendment (codicil)Codicil - an amendment to a will

Must meet all requirements of a will

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Under UPC, divorce or annulment cancels the ex-spouses inheritance under a willIntestacy

When there is no willTypically goes to children and grandchildren

Power of attorneyA document that permits the attorney-in-fact to act for the principal; need not be a lawyerDurable power is valid even if the principal can no longer make decisions for herselfImmediate power becomes effective when signed, a springing power is effective at some time in the future, typically when the principal becomes incompetent and is no longer able to manage his affairs

ProbateProbate court appoints an adminstrator to fulfill same functions if the decedent does not select an executorTypically given 1 - 5% of estate's value as a fee

Property not transferred by willA will does not control the distribution of joint property, retirement benefits, or life insurance

Anatomical giftsUniform 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 two witnesses

Living willsIn the event that a person is unable to make medical decisions, this document indicates her preferences and may also appoint someone else to makes these decisions for her; aka advance directiveUltimately, the Supreme Court upheld a law that family members cannot choose to discontinue treatment for an incompetent person unless there is clear and convincing evidence the patient would have made that choice herselfHealth care proxy - someone who has the authority to make health care decisions for a person who is incompetentAssisted suicide - the process of hastening death for a terminally ill patient at the request of the patient

TrustsAn entity that separates the legal and beneficial ownership of assetsInvolves 3 people:

The grantor (aka settlor or donor) - who creates and funds itThe trustee - who manages the assets; holds legal titleThe beneficiary - who receives the financial proceeds; holds equitable title

4 requirements for establishing a trust:Legal capacity - of legal age and sound mindTrustee - grantor must appoint at least one trustee (who may be the grantor himself); trust does not end if the appointed trustee dies or resignsBeneficiary - must have specific beneficiaries, although it need not list them by name; i.e., class "living children of grantors"Trust property - grantor must transfer specific assets to the trust, although these assets can be nominal

Advantages and DisadvantagesAdvantages

ControlCaring for childrenTax savingsPrivacy (wills become a matter of public record)Probate (heirs may not receive assets for some time as it goes through probate process)Protecting against creditors (asset protection trusts)

DisadvantageExpense - trusts are very complex; legal fees, paying trustees

Types of trusts

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Living trustA trust established while the grantor is still aliveInter vivos trustGrantor serves as trustee during his lifetime; Maintains total control over assets and avoids trustee's feeAll the assets stay in the trust and avoid probateMost are revocable - a trust that can be terminated or changed at any time

Testamentary TrustOne that goes into effect when a grantor diesIs irrevocableGrantor's property must first go through probate on its way to the trust

Trust administrationIn carrying out the terms of the trust, the trustees have a fiduciary duty to the beneficiary, which includes:

A duty of loyalty - must put the interests of the beneficiaries firstA duty of care - must act as a reasonable person would when managing the assets of another

A trustee is liable to the beneficiaries of the trust if she breaches her dutyParadee v. Paradee

Facts:Charles Paradee, Senior had a son, Junior, and a grandson Trey; Senior remarried after 1st wife died; Junior and 2nd wife Eleanor hated each other so Junior and Senior stopped their relationship; but Senior maintained a loving relationship with TreySenior created an irrevocable trust for Trey; $366,000 which it used to buy an insurance policy on the lives of Senior and Eleanor; once both died, Trey would get $1.7Million; Sterling was the initial trustee and Trey could e the trustee when he turned 30They sent a letter to Sterling to revoke the Trust; family lawyer said it's irrevocable; but there was a right to loan the assets, but had to be the same as an arms-length transaction; Sterling borrowed money from the insurance company with the policy as security and loaned it to Senior and Eleanor with very favorable termsSenior died; Sterling made no effort to collect the loan; Trey turned 30 but Sterling did not tell him he was entitled to be trustee; When Sterling died, Eleanor appointed herself trustee; she stopped paying interest to the Trust, which meant it could not pay what it owed to the insurance company and the policy lapsedWhen trey finally found out about the Trust, he filed suit against Eleanor alleging that she had violated her fiduciary duties and had aided and abetted Sterling in the violation of his

Issue: Did Elanor violate her fiduciary duty? Is she liable for aiding and abetting Sterling?Decision:

Family lawyer testified: Eleanor consciously, intentionally, and vengefully refused to take any action to protection or preserve the Policy because she didn't want Trey to benefitTo prevail on claim for aiding and abetting a breach of fiduciary duty, need to prove

The existence of a fiduciary relationshipThat the fiduciary breached his dutyThat the non-fiduciary defendant knowingly participated in the breach, andDamages resulting from the concerted action of the fiduciary and the non-fiduciary

Eleanor induced Sterling to breach his fiduciary duties by taking advantage of his primary loyalty to the Paradees; liable to the same extent as Sterling would have been had he not passed awayJudge: I award damages of [what the policy would have been worth if it had not lapsed]Trey asks Eleanor be ordered to pay his attorney's fees and expenses; having intentionally destroyed the Trust's value, Eleanor must bear the cost of the remedying her breaches of fiduciary duty

TerminationA trust ends upon the occurrence of any of the events:

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On the date indicated by the grantorIf the trust is revocable, when revoked by the grantor; even if irrevocable the grantor and all beneficiaries can agree to revoke itWhen the purpose of the trust has been fulfilled

Rule Against Perpetuities - provides that a trust must end within 21 years of the death of some named person who is alive when the trust is created; now many states allow dynasty or perpetual trusts that can last forever

Introduction to InsurancePerson - an individual, corporation, partnership, or any other legal entityInsurance - a contract in which one person, in return for a fee, agrees to guarantee another against loss caused by a specific type of dangerInsurer - the person who issues the insurance policy and serves as guarantorInsured - the person whose loss is the subject of the insurance policyOwner - the person who enters into the insurance contract and pays the premiumsPremium - the consideration that the owner pays under the policyBeneficiary - the person who receives the proceeds from the insurance policy

Insurance ContractAn insurance policy must meet all the common law requirements for a contractMust be an offer, acceptance, and consideration; legal capacity for the owner

Offer and acceptanceThe purchaser of a policy makes an offer by delivering an application and a premium to the insurerInsurance copmany can accept by oral notice, by written notice, or by delivery of the policy; also ha a 4th option -a written binder

Binder - short document acknowledging receipt of the application and premium; indicates the policy is in temporary effect but does not constitute final acceptance

Limiting Claims by the InsuredInsurable interest

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

DefinitionA person has an insurable interest if she would be harmed by the danger that she has insured againstInsurable interest - someone would suffer a loss if the insured event occurs

Amount of lossInsurable interest can be no greater than the actual amount of loss suffered

Life insuranceA person always has an insurable in his own life and the life of the spouse or fiancee; parents and minor children also have an interest in someone who owes them money

Work relationshipsSome companies sometimes by key person life insurance on their officers as compensation if they were to die

MisrepresentationInsurers have the right to void a policy if, during the application process, the insured makes a material misstatement or conceals a material factIs voidable whether the misstatement was oral or in writing; and whether it was intentional or unintentionalMissrepresentation can be material even if its not related to the actual cause of death

Bad Faith by the InsurerInsurance policies often contain a covenant of good faith and fair dealingAn insurance company can violate the covenant by

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Fraudulently inducing someone to buy a policyRefusing to pay a valid claim, or Refusing to accept a reasonable settlement offer that has been made to an insured

When it violates the covenant, it becomes liable for compensatory and punitive damagesFraud

A number of insurance companies have paid serious damages to settle fraud charges involving the sale of life insurance

Refusing to pay a Valid ClaimDamage awards are often sizeable when an insurance company has refused to pay a legitimate claim

Goodson v. American Standard Insurance Company of WisconsinFacts:

Goodson and her two children were in a car accident while driving a car owned by Chet Weber; he was insured by American StandardTo treat injuries, sought care from a chiropractor with bills about $8000 which were submitted to American StandardCompany came up with many excuses to not payFiled suit against insurance company alleging bad faith breach of insurance contractDelay in payment didn't cost money but had cause emotional distressJury awarded $75,000 in actual damages and an additional $75,000 in punitive damages; appeals court overturned the verdict; Goodson appealed to the state Supreme Court

Issue: Can Goodson recover damages for emotional distress without showing any economic loss caused by American Standard's delay in paying her claim?Decision:

Insured must show that a reasonable insurer under the circumstances would have paid or otherwise settled the claimMust establish the insurer's breach was accompanied by circumstances of fraud, malice, or willful and wanton conductPunitive damages award cannot exceed the amount of actual damages and may be increased or decreased by the courtGoodson proved to the jury that she suffered emotional distress as a result of this delayThe fact that an insurer finally pays in full does not erase the distress caused by the bad faith conductReverse the court of appeals and remand the case to the court with instructions to reinstate the trial's court judgment entered on the jury verdict

Refusing to accept a settlement offerViolates the covenant of good faith and fair dealing when it wrongfully refuses to settle a claim

Types of InsuranceProperty insurance - aka casualty insurance; covers physical damage to real estate, personal property, or inventory from causes such as fire, smoke, lightning, wind, riot, vandalism, or theftLife insurance - provides for payments to a beneficiary upon the death of the insured

Term insurancesimplest, cheapest life insurance optionPurchased for a specific period

Whole life insuranceWhole life or straight life - designed to cover the insured for this entire lifeDisadvantages:

Investment returns from the savings portion of whole life insurance have traditionally been mediocreA significant portion of the premium for the 1st year goes to pay overhead and commissionsUnless the customer holds a policy for about 20 years, it will typically generate little cash value

Universal life

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Flexible combination of whole life and termAnnuities

Payment to a beneficiary during his lifetimeDeferred annuity contract - the owner makes a lump-sum payment but receives no income until some later date

Health InsuranceTraditionally are pay for service - insurer pays for virtually any treatment that any doctor ordersPolicyholders have the largest possible choice of doctor and treatmentHealth maintenance organizations (HMOS) - patient can be treated only doctors in the organization unless there is some extraordinary need for an outside specialist

Disability insuranceReplaces the insured's income if he becomes unable to work because of illness or injury

Liability insuranceReimburses the insured for any liability she incurs by accidentally harming someone else

Those injured on property owned by the insuredInjured by the insured away from home or businessThose whose property is damaged by the insured

Business: professional malpractice, product liability, employment practices liability insuranceAutomobile insurance

Collision - covers the cost of repairing or replacing a car this is damaged in an accidentComprehensive - covers fire, theft and vandalism

But not collisionLiability - covers harm the owner causes to other people or their property - such as their bodies, cars, or stone walls; most states require liability insuranceUninsured motorist covers the owner and anyone else in the car who is injured by an uninsured motorist

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