General Business Law

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General Business Law

A Practical Approach
















2


General Business Law



Table of Contents

Chapter 1. Legal, Business, and E
-
Commerce Environment

Chapter 2. Agency

Chapter 3. Partnership

Chapter 4. Corporations

Chapter 5. Estates and Trust

Chapt
er 6. Contracts

Chapter 7. Contract Performance

Chapter 8. Rights and Duties

Chapter 9. Guarantors

Chapter 10. Personal Property, Bailments and Computers






3


Galilee College ©

Chapter 1
. Legal, Business, and E
-
Commerce Environm
ent

Definition of law

Law is a body of rules of action or conduct prescribed by controlling authority, and
having binding legal force. That which must be obeyed and followed by citizens subject
to sanctions or legal consequences is a law.

Functions of law




Keeping the peace



Shaping moral standards



Promoting social justice



Maintaining the status quo



Facilitating orderly change



Facilitating planning



Providing a basis for compromise



Maximizing individual freedom

Flexibility of the law

Law responds to c
ultural, technological, economic, and social changes. Laws that are
no longer viable are often repealed, although it may take years for that to happen.
Sometimes, because of error or misuse, the law does not reach a fair result.

Schools of jurisprudential
thought




Natural Law School

believes law is based on what is correct. Emphasizes that
law should be based on morality and ethics



Historical School

believes that law is an aggregate of social traditions and
customs



Analytical School

believes that law is s
haped by logic



Sociological School

believes law is a means of achieving and advancing certain
sociological goals



Command School

believes law is a set of rules developed, communicated, and
enforced by the ruling party



Critical Legal Studies School
-
believ
es legal rules are unnecessary and legal
disputes should be solved by applying arbitrary rules based on fairness



Law and Economics School

believes that promoting market efficiency should
be the central concern of legal decision making



Feminist School

bel
ieves that the female perspective should be taken into
account when legislators and judges develop, interpret, and apply law


4

Development of the US legal System

The US court system developed from English common law. Under traditional English
common law, th
ere were three types of courts:

Law courts

courts that developed and administered a uniform set of laws decreed by
the kings and queens after William the Conqueror. Legal procedure was emphasized
over merits

Chancery (equity) courts

courts that granted rel
ief based on fairness

Merchant courts

courts established to administer the "law of merchants"

Adoption of English common law in the US

All states except Louisiana base their
legal systems primarily on English common law.

Because of its French heritage, Lou
isiana bases its legal system on civil law.

Sources of US law




Constitution of the US

supreme law of the US



Treaties

compacts made between two or more nations



Codified law



Statutes

written law enacted by the legislative branch of federal and state
gover
nments that establishes certain courses of conduct that must be adhered to
by covered parties



Ordinances

laws of local government bodies



Executive orders

orders issued by a member of the executive branch of
government



Judicial decisions

decisions about
an individual lawsuit issued by federal or
state courts



Administrative agency regulations and orders

rules and regulations adopted by
agencies created by the legislative and executive branches of government

Doctrine of stare decisis

Precedent is a rule o
f law established in a court decision. Lower courts must follow the
precedent established by higher courts. The doctrine of stare decisis means "to stand
by the decision" or adherence to precedent.

Other countries' legal systems

There are other major legal

systems in addition to the Anglo
-
American common law
system. Major systems include:



Romano
-
Germanic civil law system



Sino
-
Soviet Socialist law system



Hindu law system



Islamic law system

E
-
commerce and Internet Law

Our legal system has adapted to the r
eality of e
-
commerce and the Internet. For
example, contracts on the Internet are treated as any contract is treated under the law.

5

However, there are many issues, such as taxation of sales on the Internet,
pornography, intellectual property, etc., that st
ill need to be addressed.

Critical Legal Thinking

Critical legal thinking is the process of specifying the issue
presented by a case, identifying the key facts in the case and applicable law, and then
applying the law to the facts to come to a conclusion t
hat answers the issue presented.
Use the "case for briefing" exercise at the end of the chapter as a tool to teach students
critical legal thinking.

Terms




case brief

a summary of each of the following items of a case: case name and
citation, key facts, is
sue presented, holding of the court, court's reasoning



common law

Developed by judges who issued their opinions when deciding a
case. The principles announced in these cases became precedent for later
judges deciding similar cases.



Constitution of the Un
ited States of America

The supreme law of the United
States.



court of chancery

Court that granted relief based on fairness. Also called
equity
court
.



critical legal thinking

the process of specifying the issue presented by a case,
identifying the key fac
ts in the case and applicable law, and then applying the law
to the facts to come to a conclusion that answers the issue presented.



executive order

An order issued by a member of the executive branch of the
government.



judicial decision

A decision about
an individual lawsuit issued by federal and
state courts.



jurisprudence

The philosophy or science of law.



law court

A court that developed and administered a uniform set of laws
decreed by the kings and queens after William the Conqueror, legal procedure

was emphasized over merits at this time.



law

That which must be obeyed and followed by citizens subject to sanctions or
legal consequences; a body of rules of action or conduct prescribed by
controlling authority, and having binding legal force.



merchan
t court

The separate set of courts established to administer the "law of
merchants."



ordinances

Laws enacted by local government bodies such as cities and
municipalities, counties, school districts, and water districts.



precedent

A rule of law establishe
d in a court decision. Lower courts must
follow the precedent established by higher courts.



stare decisis

Latin: "to stand by the decision." Adherence to precedent.



statute

Written law enacted by the legislative branch of the federal and state
government
s that establishes certain courses of conduct that must be adhered to
be covered parties.



treaty

A compact made between two or more nations.


6

Class Questions

1.

Name at least six of the eight functions of law.

2.

List seven different schools of jurisprudential
thought.

3.

Describe the difference between law courts and chancery courts.

4.

Explain the difference between executive orders and judicial decisions.

True or False

Answer True or False for each of the following statements:

1.

All laws in the United States are base
d on English common law.

2.

Once a law is recorded, it can never be changed.

3.

The feminist legal theory considers the perspectives of women as they
relate to legal decisions.

4.

The analytical school of jurisprudence is based upon morality and ethics.

5.

If a case i
s decided the same way that a similar case was decided five
years ago, the Command School of jurisprudence was used.

6.

Followers of the Sociological School of jurisprudence are known as
commercialists.

7.

Law courts developed and administered a uniform set of l
aws decreed by
kings and queens after William the Conqueror.

8.

Law courts emphasized the merits of the case rather than legal procedure
or precedence.

9.

Our basic laws regarding commerce came from the English Law
merchant.

10.

The Romano
-
Germanic law system is com
monly known as the foundation
of criminal law.

11.

Congress has the power to enforce the law.

12.

Powers not given to the federal government by the Constitution are
reserved for the states.

13.

A member of the executive branch of the government issues an executive
ord
er.

14.

Members of the legislature hand down judicial decisions.

ESSAY QUESTIONS

Define law.

List and describe the functions of law.

Describe the flexibility of the law.

List and describe the schools of jurisprudential thought.

Explain the development of the U
S legal system.

Explain how English common law was adopted in the US.

List and describe the sources of law in the US.

Define the doctrine of stare decisis.

Describe other countries' legal systems.

Describe the development of E
-
Commerce and Internet law.

Ap
ply critical legal thinking in analyzing judicial decisions.


7


Galilee College ©

Chapter 2. Agency


A. Formation and Termination



F
undamentals
. Agency is an express or implied consensual relationship formed when two parties
agree that one, the agent, will represent the other, the principal, in dealing with third parties. The agent
is subject to the principal's control and can affect t
he principal's legal relationships with third parties.
Absent special circumstances, only the principal is legally responsible for transactions negotiated by an
agent. The principal ordinarily has contractual liability to third parties for contracts entere
d into by the
agent on behalf of the principal. Thus, the principal
-
agent relationship is representative. The agent has
derivative authority to act for, and in place of, the principal. The agent is an extension of the principal.


i.

The principal must mani
fest consent that the agent may act on the principal's behalf. The test for
the existence of an authorized agency is objective.

ii.

The requirements to form an agency relationship are an agreement between principal and agent on
the relationship and subject mat
ter, legality of the subject matter, and capacity of the principal.

iii.

Master
-
servant is old terminology (which you may still run across) for employer
-
employee. A
servant is a type of employee whose actions are entirely subject to control by the employer du
ring
the relationship. The servant/employee is employed to do physical acts and perform services for
the employer, rather than act as a business representative. Other employees may qualify as
agents and be subject to lesser physical control.

iv.

An employee'
s action are entirely subject to control by the employer during the relationship. An
independent contractor is generally hired to achieve certain results without much control over
his/her performance. Other factors to be considered are the mode of paymen
t, whether the
contracting parties are in distinct businesses or occupations, whether the work is supervised and
performed with the employer's tools and supplies, the length of the employment, and the degree of
skill involved.


1.

Oral agreement usually suff
ices to form an agency, but purchase of land is subject to the statute of
frauds. Under the equal dignities rule, an agency relationship must be willing if the object of the agency
is subject to the statute of frauds.

i.

An agent's acts are deemed to be the
acts of the principal

ii.

The agency relationship is terminated by operation of law when the subject matter of the
agency relationship was destroyed.


2.

An agency is based on the consent of both principal and agent and may be terminated by an act of
either part
y.

i.

Thus, it may be terminated by the agent's giving notice of renunciation to the principal.


8

ii.

An agency relationship is terminated by operation of law when the principal is declared
incompetent in a judicial proceeding.


3.

A power of attorney is a writte
n authorization for the agent to act on behalf of the principal. It can be
general, or it can grant the agent restricted authority.

i.

In the absence of a special rule, an agency and the agent's power to bind the principal
terminate instantly upon the death
of the principal because the principal must exist at the time
the agent acts.


4.

An agency coupled with an interest is one in which the agent has a specific, present, beneficial interest
in property which is the subject matter of the agency. A principal doe
s not have the right or power to
terminate an agency coupled with an interest. In any agency relationship, the agent may terminate at
any time without liability if no specific period for the agency has been established.

i.

An agency relationship is terminate
d by operation of law if the principal becomes legally
incompetent

ii.

Apparent authority ceases upon termination that occurs by operation of law.


5.

When a principal discharges an agent, (s)he must give actual notice of the discharge to those the agent
had pr
eviously dealt with and constructive notice to others who might have known of the agency.


B. Principal's Liabilities


1.

The principal has a duty to disclose known risks involved in the task for which the agent was engaged
if the principal knows the age
nt is unaware of the risks.

i.


The duty applies if the principal should know of the risk and if the principal should know the
agent is unaware of the risk.

ii.

Most agency relationships are governed by contract, and thus fundamental duties are set forth
in the

agreement. The fundamental duties set forth in the agency agreement may be
expressed or implied.



Two implied fundamental duties of a principal to an agent are to compensate the agent for
his/her services and to indemnify or reimburse the agent for auth
orized expenses incurred
on behalf of the principal.



Any renunciation of these duties would require an express agreement.


2.

Apparent authority is what third parties believe an agent possesses because of the actions of the
principal or the outward appearan
ces of the agency relationship. It is a form of estoppel.

i.


Express limitation do limit an agent's actual authority. But if they are not known by third
parties, they do not affect apparent authority.


3.

A principal is strictly liable for a tort committed b
y an agent within the scope and during the course of
the agent's employment (vicarious liability). This liability is without regard to fault of the principal.

i.

Vicarious liability does not apply when the agent performs as an independent contractor. A
pe
rson is liable for his/her own negligent acts, even if performed as an agent of another.

ii.

A principal is liable to third parties for all acts of its employees committed within the course and
scope of their employment (even if the employee was instructed no
t to do the act). A principal

9

is generally not liable for the acts of an independent contractor if not subject to the control of
the employer. There are exceptions, e.g., if the principal authorizes frauds.

iii.

A principal is strictly liable for the torts of

an agent committed within the course and scope of
the agency agreement, that is, in furtherance of the purpose of the agency. The principal's
liability to the third party would be for acts of the agent within the scope of the agent's actual or
apparent a
uthority.


C. Disclosed and Nondisclosed Principlals


1.

Actual authority is conveyed by the principal's manifestation of consent to the agent to bind the
principal to third parties. Actual authority is not affected by failure to disclose the principal.

i.

When

a principal is nondisclosed, the third party believed (s)he is dealing directly with the
agent. Thus, under general contract law, an agent is liable to the third party intended to deal
only with the agent. An agent who discloses the principal and acts
within actual or apparent
authority ordinarily binds only the principal.

ii.

The third party can look to either the agent or the nondisclosed principal for performance of the
contract.

iii.

The third party is entitled to enforce a contract against the agent of a no
ndisclosed principal
and against the nondisclosed princip[al when the third party discovers the principal and elects
to hold him/her liable.

iv.

An agent's actual authority is conveyed by communication to the agent from the principal. It is
not practical to e
xpressly state each act authorized to perform the agent's purpose. So the law
recognize an agent to have both expressed and implied actual authority. Implied actual
authority is for acts reasonably necessary to execute express authority.


Remember
: A pri
ncipal is liable on contracts made by the agent with actual or apparent authority.


2.

A third party may elect to hold a nondisclosed principal liable once the principal is disclosed. A
principal, whether nondisclosed or not, can always be held liable for a
valid contract entered into by an
agent acting within the scope of actual authority, regardless of whether the principal ratifies the
contract.

i.

A nondisclosed principal is generally not liable for acts of the agent beyond the scope of actual
authority.

ii.

The

third party may recover for breach of contract from the agent of a nondisclosed principal
and from the nondisclosed principal when the third party discovers the principal and elects to
hold him/her liable.


3.

An agent owes a fiduciary duty to the principa
l. An agent must act soley in the interest of the principal,
and not in his/her own interest or the interest of the third party.

l.

An agent has express and implied actual authority, which is conveyed by manifestations of the
principal to the agent. Implie
d authority is to do what is reasonably necessary to accomplish that
which was expressly authorized.


4.

The person who ratifies becomes legally bound on a contract that was entered into by another who,
without authority, purported to act as the principal's
agent. To ratify a contract, the principal must have
full knowledge of the material facts.



10

Reminder Note:

Apparent authority arises by words or conduct of the principal manifested to a third party
which induces the third party to rely on the agent's aut
hority.

1.

A disclosed principal is liable on contracts entered into with a third party by an agent with actual or
apparent authority.

2.

An agent who acts within actual or apparent authority is not liable on the contract to the third party.

3.

An agent acti
ng within the scope of actual or apparent authority who contracts with a third party on
behalf of a disclosed principal is generally not liable on the contract to the third party.

4.

The agency is liable to the principal for losses resulting from the agent'
s breach of duty (contractual
or otherwise) to the principal. Even if the agent has the power to act beyond express or implied
actual authority, the agent does not have the right to do so.

i.

As agent, must pay to the principal any profits received from th
e agency relationship without
the principal's consent.

ii.

All persons are liable for their own negligence.

iii.

Implied authority is inferred from words or conduct of the principal to the agent. It is incidental
authority to do that which is necessary to exercis
e actual authority.


5.

Agency relationship are terminated by an act of the parties or by operation of law.

i.


Agency relationships are terminated automatically by operation of law upon the death or
insanity of either party, bankruptcy of the principal, dest
ruction of the subject, and war.

ii.

Other terminations are by an act of the parties and are not automatic. An agent's disregard for
the express limitation of his/her authority would be cause for termination by the principal, but
termination would not occur

automatically.

iii.

A terminated agent continues to have apparent authority to bind the principal until actual notice
is given to parties that have done business with the agent. Others who may know of the
agency relationship are entitled to constructive not
ice by publication. Notice is not required
when the termination is by operation of law.



ESSAY

1.

Explain an express agency.

2.

Describe two kinds of power of attorney.

3.

List five of the six ways in which agency contracts can be terminated by operation of the
law.

4.

List five types of breaches of loyalty by agents.

5.

What is the difference between intentional misrepresentation and innocent misrepresentation?

6.

What are the two tests in determining whether an agent's intentional torts were committed within
the agent's

scope of employment?













11

CASE STUDY

Respondeat Superior


Hypothetical


Description:

A truck driver strikes a pedestrian after leaving the highway for a lunch break. The
injured pedestrian runs out of insurance funds and considers suing the driver

and the company.

Topic(s): Torts, Agency

Jim is a tuck driver working for ITM, the largest paper manufacturer in the world. One of ITM’s
plants is located in Wilmington, DE just off of Rt. 95 and services many of the major retail paper
outlets in Pennsylv
ania, New Jersey and Delaware. On the morning of 6/15/01, Jim is given a
load of paper to be delivered to Maples Office Supply in Delaware County, PA. He is told to
drive along Rt. 95 until he gets to Rt. 320 and remain on this road until he reaches his
de
stination. At about 11:30am he realizes that he is hungry and pulls off the main road and takes
a two block trip to a special deli where he purchases and eats an Italian sub. He then gets back
into the truck and starts to head back to the main road. Before

he gets there he has to swerve the
truck to avoid hitting a pothole and accidentally hits Mary Smith, a 75
-
year
-
old grandmother.
Mary is hospitalized with severe injuries from which she recovers but only after months of
expensive medical care. Her medical

insurance had run out almost immediately and she was left
with tremendous bills.

Mary is trying to determine what to do and asks your help in answering the following questions:

1) Is Jim liable for Mary’s injuries?

2) Can ITM be held liable for Mary’s inj
uries?

3) Would your answer to question #2 above change if the deli were located in Atlantic City, NJ,
75 miles off the main road for the delivery in question?


















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Galilee College ©

Chapter 3. Partnership


Formation and Existence

1.

Characteri
stics of a Partnership (CULPA) governed by the Uniform Partnership Act UPA and the
Reformed Uniform Partnership Act RUPA.

C

-

Co
-
ownership

U



Unlimited Liability

L



Limited Life

P



Profit Sharing (
if no agreement, share equally
)

A



Articles of Partners
hip


2.

A partnership is an association of two or more persons conducting a business that they co
-
own for
profit.

i.

Absent association by agreement of at least two persons as partners, there is no partnership.

ii.

For federal income tax purposes, it is a flow
-
throu
gh entity

iii.

One of the distinguishing characteristics of the partnership form of business is its lack of
continuity of life

iv.

Must intend that their business make a profit, even if no profit is earned.


C.

Classification of a Partnership
. Partnership
s are classified in different ways.



1.

A partnership is traditionally classified as either general or limited.



a.

General partnership
. All partners have unlimited liability for partnership debts and activities.
It is the most co
mmon form of partnership.



b.

Limited partnership
. One or more partners are general partners with unlimited liability, and
one or more of the other partners are limited partners whose liabilities for partnership debts
are limited by the amount

of the investment in the partnership.

i.

Limited partnership act requires the filing of a certificate of limited partnership to give
notice of the limited liability of the limited partners.



2.

Partnerships are further classified as either of th
e following:



a.

Partnership for a term
. The partners specify the duration of the partnership for a specific
term or until the completion of a specific project.



b.

Partnership at will
. No fixed duration of partnership existence i
s specified.



13

c.

A joint venture is similar to a partnership, but it does not carry on a business. It is an
association of persons to undertake a specific business project for profit.


3.

Partnership formation requires agreement to associate (Agreement may be

expressed orally or in
writing)

i.

Or implied from conduct.

ii.

If agreement is for a definite period in excess of 1 year, must be in writing to be enforceable.

iii.

If statue of frauds is not complied with a partnership at will results.


4.

In each type of organization
, an express or implied agreement is reached and should be in writing.
(desirable but not legally required)

5.

C.

The Limited Liability Company
. The limited liability company (LLC) is a distinct legal entity that is a
hybrid of a corporation an
d a partnership. Every state has statutorily provided for organization of this
entity to grant investors not only limited liability (like a corporation) but also special tax treatment (like
partnership); thus, losses pass through to investors who may be ab
le to use them to offset other taxable
income. Moreover, a Uniform Limited Liability Company Act has been adopted by the National
Conference of Commissioners on Uniform State Laws. The ULLCA has many provisions similar to those
in the RUPA.



1
.

Typically, two or more persons (called members) may form an LLC by filing articles of organization
(similar to articles of incorporation) with the appropriate office of the secretary of state.



a.

Members may include corporations, partnershi
ps, and foreign investors.



2.

The articles of organization usually must contain the words "Limited Liability Company" or "limited
company" or the abbreviation "LC" or "LLC."


Authority and Liabilities



Powers among Partners
. The
powers of partners are largely defined by the rules of law applicable to
agents. In one sense, every partner is a principal. However, for all purposes within the scope of
partnership business, every partner is also an agent of the partnership as well as an

agent of all other
partners. A partnership may assign his or her interest in the partnership, but is not allowed to assign
rights in specific partnership property.

i.

A partner’s individual creditors may not attach partnership property but may charge a par
tner’s
楮ie牥獴⁩ ⁴he⁰a牴re牳桩r.

楩i

Only a claim against the entire partnership allows specific partnership property to be attached.

iii.

The partnership owns specific partnership property

iv.

Each partner’s legal interest is a tenancy in partnership



The partner ow
ns no specific partnership property but co
-
owns all partnership property with all
other partners.

vi.

Specific partnership property is subject to a right of survivorship in the surviving partners.

Note: The RUPA abolished the tenancy in partnership



1.

Each pa
rtner, as agent of a general partnership, has apparent authority legally to obligate the

14

partnership in any transaction within the usual course of partnership business.

i.

Unauthorized acts not within the apparent scope of partnership business obligates neith
er
the partnership nor the other partners, unless they ratify it.



Ratification is approval after the fact of an unauthorized act and binds the partnership
as if the partner has been initially authorized.



Ratification may be express or implied from conduct
of the principal.


ii.

Disposing of partnership goodwill is one of the act that requires consent of all partners.

iii.

A general partnership is bound on a contract made by a partner acting within the scope of
his or her actual authority (either express or implied)
or by the apparent authority a third
party reasonably believes an agent has.



2.

The partners may not limit partnership liability to third parties by agreement between the partners
alone

i.

Partners are jointly liable on a partnership contract. All partners m
ust be named in a lawsuit
to enforce it.

ii.

A judgment can be enforced against the personal assets of any partner but only after
partnership assets are exhausted.



RUPA provides that partners are jointly and severally liable for all obligations of the
partners
hip, including those arising out of a contract.

iii.

RUPA provides for filing of a statement of authority that may give constructive notice of
limitations on the authority of a partner.

iv.

Partners are jointly and severally liable for the torts committed by anothe
r partner who acted
within the ordinary course of the partnership business or with the authorizaton of the other
partners

a)

unless the third party knows that the acting partner lacks actual authority.



Joint and several liability means that all of the partner
s are liable, but a third party may
hold any partner liable for the entire amount.




3.

A
limited partner’s liability

for partnership obligations is limited to his or her capital contribution to
the business, whereas, a general partner has unlimited persona
l liability to the partnership debts.

1.

The limited partner is also restricted in the right to control the partnership

2.

She or he is not allowed to participate in the day to day management of the partnership
business

3.

A limited partnership must have at least o
ne general partner with unlimited liability

4.

A general partner may be another partnership, a corporation, or another entity.

5.

A general partner may also be a limited partner

6.

A limited partner and the partnership may engage in transactions such as extending s
ecured
credit or property sales.

7.

Both the general and limited partnership have the right to inspect and copy the books of the
partnership at anytime.


Allocation of Profit or Loss



The
right to share in profits
. Unless otherwise agreed, each partner is p
resumed to have an equal
share in partnership profits (UPA and RUPA). Partners are not entitled to compensation for their
actions, skill, and time applied on behalf of the partnership except when such an arrangement is

15

explicity provided for in the partn
ership agreement.


1.

The partnership agreement, to the extent it allocates partnership losses among partners,
governs.

2.

Absent agreement, a partner shares losses in the same proportion she or he shares profit.

Transfer of Interest

1.

Partnership rights may be a
ssigned without the dissolution of the partnership.

i.

The assignee is entitled only to the profits the assignor would normally receive.

ii.

The assignee does not automatically become a partner and would not have the right to
participate in managing the business
or to inspect the books and records of the partnership.

iii.

If a partner sell his or her interest to a third party, all other partners must agree so that the new
partner is vested with all partnership rights, duties and powers, including the right to participa
te
in management.


Remember: A partner may assign his or her interest in the partnership, but is not allowed to assign
rights in specific partnership property.



Unless the partnership agreement prohibits it, a partner in a general partnership may
validly a
ssign rights to his or her share of partnership distributions.

iv.

A new partner has unlimited liability for partnership obligations arising subsequent to this or her
admission as partner.



Satisfaction of any partnership liability incurred before his or her ad
mission may come only
from partnership property unless agreed otherwise.



This means that the new partner’s liability for antecedent debts and other obligations of the
partnership is limited to his or her capital contribution.



Incoming partners may assume
personal liability for existing partnership debts.


Dissolution And Termination



2.

Dissolution

is the change in the relation of the partners caused when any partner ceases to
be associated in the carrying on of the business (UPA Section 29).



a.

Dissolution is not itself a termination of the partnership or of the rights and powers
of the partners.



1)

Many rights and powers continue during the winding
-
up process that follows
dissolution.



3.

Dissolution may

occur in a number of circumstances:

i.

Act of the partners (agreement to end partnership)

a.

Partners always have the power to dissolve a partnership, although they do not
always have the right to do so.

i.

Dissolution in violation of a partnership agreement Is w
rongful and
carries with it exposure to liability for damages

ii.

When partnership agreement does not specify a duration or objective,
the partnership is at will and may be rightfully dissolved at any time.



Although actual authority to act on behalf of the par
tnership ceases at

16

dissolution, apparent authority to conduct business in the usual way
continues until notice is given to third parties for the partnership business
winds up.



A partner’s liability for the existing obligations of the partnership does not
c
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ii.

Operation of law (bankruptcy of partnership also)

iii.

Court order

3.

In winding up, partnership assets must be applied in the following or
der:

i.

Claims to outside creditors

ii.

Claims of partners as creditors

iii.

Claims of partners for capital

iv.

Claims of partners for profits


4.

Under the UPA, the death of a partner automatically dissolves a partnership by operation of law,



The partnership interest becom
es part of the deceased partner’s estate.



However, neither the executor nor the successor to the partnership interest automatically
becomes a partner unless the other partners agree.



The estate is responsibility for the partner’s allocated share of any pa
rtnership liabilities.



Under RUPA, death of a partner results in dissociation, not automatic dissolution.

other causes include:

i.

Bankruptcy of partnership

ii.

Subsequent illegality of partnership purpose


5.

Under the RUPA, the process of ending the partnership be
gins with dissociation. Once a partner is
dissociated, dissolution, winding up, and termination may or may not proceed.

i.

Dissociation is the legal effect of a partner’s ceasing to be associated in carrying on the
business of the partnership

ii.

After dissociat
ion, the business either continues after purchase of the dissociated partner’s
interest or the process of dissolution, etc., begins.


6.

Dissociation results, for example, notice of a partner’s express will to withdraw, an even stipulated in
the agreement, ex
pulsion of the partner, death, incapacity, or insolvency.

i.

The partnership is not dissolved by dissociation unless it occurs by express will of the partner.


ESSAYS

1.

Define
general partnership

and describe how general partnerships are formed.

2.

List and expla
in the rights and duties among partners.

3.

Describe the partners' right to participation in the management of the partnership.

4.

Describe the right to share in the partnership's profits and losses.

5.

Define
duty of loyalty

among partners and identify violatio
ns of this duty.

6.

Explain the duty of care owed by a partner.

7.

Explain the contract and tort liability of partners.

8.

Describe the liability of incoming and outgoing partners.

9.

Describe how a partnership is dissolved and terminated.

10.

Explain how partners ma
y continue a dissolved partnership.


17

CASE STUDY


Partnerships at the Mall


Hypothetical


Description:

Creditors, seeking money from a small retail business, attempt to collect from the
mall in which the store is located. The creditors claim that the arra
ngement between the business
owner and the mall was a partnership, and that the mall has unlimited liability.

Topic(s): Negotiable Instruments and Credit, Agency

Mary Howe decides that because of her love and knowledge of the jewelry business she would
ope
n a specialty
-
type jewelry store in the local mall, which is one of the largest in the world. She
intends to sell only pieces that retail at a minimum of $5,000 each. Because of her limited
resources, however, she borrows money from a local bank and also m
akes an arrangement with
the mall owners to pay rent equal to $1,000 per month and 10% of the profits. In a typical month
based on profits of $20,000, that should total $3,000.

Mary purchases inventory and does well for about three months when the bottom
drops out. The
specialty jewelry clientele in the area had been exhausted and she starts to lose money. She
eventually closes the business owing her creditors quite a bit of money.

Mary’s creditors, realizing that Mary had no personal funds of her own, dec
ide to approach the
mall owners to collect. Their claim was that the arrangement between Mary and the mall was a
partnership and their liability was unlimited with respect to Mary’s business debts.

Please answer the following questions:

1) Was the arrange
ment between Mary and the mall a partnership?

2) Suppose Mary had hired Don to work as her store manager but told him that he was not to
purchase anything with a retail value over $100 without her permission. Being unaware of this
limitation a supplier agr
ees, at the request of Don, to sell them jewelry with a retail value of
$2,000 each. Mary refuses to pay for the jewelry. Is she liable?











18



Galilee College (C)

Chapter 4. Corporations


A. Formation, Purposes, and Powers

Re
vised Model Business Corp
oration Act
: A Corporation is a form of business organization recognized as
a legal entity with rights and liabilities separate and distinct form those persons who own and manage it.
(Filing is with state authority)


Characteristics (
ISOLO
)

I
= Articles

of
I
ncorporation

S

= Separate Legal Entity

O

= Ownership transferable by units (S/H can assign shares, but not corporation property)

L

= Limited Liability

O

= Organization Structure


1.

Filing organizational documents is with state authority. This is necess
ary for both a corporation and a
limited partnership.

2.


i.

They both may assign an ownership interest.

ii.

Each owns an intangible property right in and undivided share of all the assets of the
business. Neither has an interest in specific property of the busi
ness.

iii.

However, a corporation has perpetual existence unless it is given a shorter life under the
articles of incorporation of is dissolved by the state. Death, withdrawal, or addition of a
shareholder, director, or officer does not terminate its existence
.


3.

S Corporation meets specific requirements, such as having no more than 75 shareholders, and makes
an election under subchapter S of the Internal Revenue Code.

i.


The corporation is generally not subject to federal tax on its income. Its shareholders ar
e
taxed on the federal tax on its income.

ii.

Its shareholders are taxed on the corporate earrings even if not distributed, and may deduct
corporate losses.


4.

The Revised Model Business Corporation Act requires the number of shares the corporation is
authoriz
ed to issue must be contained in the articles of incorporation.

i.

The corporation’s bylaws are the rules and regulations that govern its internal management.

a.


The adoption of the bylaws is one of the first items of business at the organizational
meeting.


b.

Under the Revised Model Business Corporation Act, either the incorporators or the board
of directors may adopt the bylaws. Bylaws are independent of the articles of incorporation
and do not have to be publicly filed. The articles are filed with the app
ropriate public
official. They include the name of the corporation, the names of the incorporators, the

19

name of the registered agent, the address of the initial registered office, and the number of
authorized shares.


5.

A closely held corporation is owned b
y a few shareholders. Statutes permit closely held corporations to
be managed as if they were partnerships. But if the shareholders do not treat the corporation as a
separate entity, a corporate creditor may persuade a court to ignore the corporate form
and hold the
shareholders personally liable. E,g,



Undercapitalization is evidence of possible fraud on creditors.



by disregarding formalities,

Note
: Commingling of shareholders' personal funds with those of the corporation is evidence that
the corporat
ion is merely the alter ego of the shareholders and that the corporate form is a sham.

i.

A close corporation has relatively few shareholders, the shares are not publicly traded, and the
owners are usually involved in management.

ii.

Many state statutes are no
t drafted to allow the flexibility and simplicity needed by organizers of
a close corporation. However, the close corporation is a separate legal entity: it may sue and
be sued, own property, make contracts, and exercise a wide range of right in its own
name.


6.

A corporation doing business but not incorporated in that state is considered a foreign corporation and
must obtain a certificate of authority to transact business there.



A state may exercise authority over a foreign corporation if the corporation
has at least minimum
contacts with the state.



The minimum contacts might consist of activity that is not isolated and that is purposely
directed towards the state, or places a product in a stream of interstate commerce.

i.

A promoter who contracts for a nonex
istent corporation is personally liable on such contracts.
However, when the corporation adopts the contract the corporation is accepting the promoters
performance and is liable.


B. Shareholders, Directors, and Officers

Shareholders (stockholders) partic
ipate indirectly in corporate policy and management by meeting annually
and electing directors. In addition, shareholders must approve fundamental changes: ammendments to
the articles of incorporation, all actions of merger or consolidation; and any prop
osal by directors to sell,
lease, or exchange all or substantially all of the corporation’s assets.


1.

Shareholders have a fundamental right to inspect the corporation’s books and records.

i.

The right must be exercised for a proper purpose and in a proper mann
er. Use of corporate
shareholder records for a personal businesses not a proper purpose because it does not
concern the shareholder's interest in the corporation.

ii.

Shareholders do not have the right to manage the corporation or its business.


2.

A derivative

suit is a cause of action brought by one or more shareholders on behalf of the corporation
to enforce a right belonging to the corporation.

i.

Shareholders may bring such an action when the board of directors refuses to act on the
corporation's behalf. G
enerally, the shareholder must show

(1)

(s)he owned stock at the time of the wrongdoing,


20

(2)

(s)he made a demand to the corporation to bring suit or take other appropriate action, and

(3)

a bad faith refusal of the board of directors to pursue the corporation's int
erest. The
recovery, if any, belongs to the corporation. An action to recover damages from corporate
management for an ultra
vires
act is an example of a derivative suit. * An ultra
vires

act
is one beyond the limits of the corporate purposes defined

in the articles of incorporation.


3.

The Board of Directors have the vest authority to formulate and implement corporate policy is,
including selecting officers, determining capital structure, proposing fundamental changes, declaring
dividends, and setting

management compensation.



Amending the corporate charter is a power reserved to the shareholders.

i.

Directors An officer, like a director, owes fiduciary duties of care and loyalty to the corporation
and its shareholders.

ii.

Directors are required to discl
ose fully the financial interest in the transaction to which the
corporation was a party.

iii.

But a transaction that is approved by a majority of informed, disinterested directors or
shareholders, or that is fair to the corporation, is valid notwithstanding
a conflict of interest.


4.

The Model Business Corporation Act (MBCA) or its 1984 revision (The RMBCA) has been adopted to
some degree by every state. The RMBCA states that corporations may indemnify their officers for
liability incurred in a suit by shareh
olders, except when inconsistent with public policy, to the extent
provided by articles of incorporation, bylaws, actions of the board, or contract.


C. Financial Structure, Capital, and Distributions

1.

Debt Securities. Two basic ways to initially finance a

corporation include issuing equity securities and
issuing debt securities.

i.

Debt securities represent a debtor
-
creditor relationship between the corporation and the
security holder, whereas equity securities reflect an ownership interest.

ii.

A bond is a neg
otiable security that embodies the corporation's promise to pay a specified
amount at a future date (plus interest).

iii.

A convertible bond is convertible into a share or shares of stock. A debenture is an unsecured
bond, backed only by the general obligati
on of the corporation to pay.

a.

Consideration for issuance of shares may be in form of cash, property, or past services
rendered.

b.

If stated par value exceeds the amount a shareholder paid for shares at issuance, the
shareholder remains liable for any such
excess.

c.

Shares may be issued pro rata and without considered to the shareholders by an action of
the directors.

d.

Treasury shares have the status of authorized but unissued shares, which may be used for
stock dividends.

i.

If the state statute require that th
e corporation maintain a stated or legal capital
account, an if no
-
par shares are issued, the entire consideration received for the
shares must be allocated to the stated capital of the corporation except to the
extent that the directors in their discretio
n allocate (within 60 days) any part of the
proceeds to capital surplus.


21

ii.

A stock dividend is a distribution of additional shares of the corporation's stock in
proportion to current holdings. Total shareholders' equity is not changed. The
value is transfer
red from earned or capital surplus to stated capital.



Earnings and profits is a tax account that is not changed by a stock dividend
because it does not affect the corporation's economic ability to pay cash or
property dividend.

iii.

A stock splits is not a di
stribution from assets or capital. The amount of earned or
capital surplus or stated capital does not change.



Instead, each share of a class of stock is divided into multiple units. The effect
is to reduce the value of each share, not the size of the eq
uity interest or a
shareholder's proportionate ownership.


2.

A preferred shareholders has the right to a dividend of a fixed amount before a common shareholder
may receive any dividends.

i.

But a dividend on any kind of stock is only a legal obligation (debt)

of a corporation after it has
been declared.

ii.

The holder of preferred stock must be paid the stated dividend before a common shareholder
may receive any dividends.

iii.

If payment of the stated dividend is not made to a cumulative preferred shareholder in an
y
year(s), the dividends accumulate and must be paid in full prior to payment of any dividends
accumulate and must be paid in full prior to payment of any dividends to common
shareholders.

iv.

A dividend on any stock does not become a payment obligation (deb
t) of the corporation until it
has been declared.


3.

A corporation is merged into another when shareholders of the target corporation receive cash or
shares of the surviving corporation in exchange for their shares.

i.

The target shares are canceled, and the
target corporation ceases to exit. State law usually
requires approval by a majority of the board and a majority of the shareholders of each
corporation.

ii.

A special shareholder meeting notice (stating the purpose) and a copy of the merger plan must
be pr
ovided to shareholders of each corporation to permit informed voting.

iii.

The board of directors directly controls a corporation by establishing overall corporate policy
and overseeing its implementation.

iv.

Purchase of stock in another corporation does not usu
ally require approval by shareholders of
each corporation.

v.

In exercising their powers board members must maintain high standards of care and loyalty but
need not obtain shareholder approval except for fundamental change. It does not require
shareholder ap
proval in the absence of a bylaw or special provision in the articles of
incorporation.

vi.

Certain actions affect the corporation and its shareholders so fundamentally that they are
beyond the exclusive authority of the board and require voted approval of (us
ually a majority
of) shareholders.




22

D. Merger, Consolidation, and Dissolution

Dissenters’ Rights. Shareholders who disagree with fundamental corporate changes may have dissenters’
(appraisal) rights. The corporation must pay dissenting shareholders th
e fair value of their stock in cash
within 60 days.


1.

When a corporation is merged into another when shareholders of the target corporation receive cash or
shares of the surviving corporation in exchange for their shares.

2.

To ward off a take over attempt:



T
he target corporation may make an offer (self
-
tender) to acquire stock from its own shareholders.



Also, the target corporation may seek an injunction against the acquiring corporation on the
grounds that the attempted takeover violates federal antitrust la
w.

i.

State law usually require approval of the board and a majority of shareholders of each
corporation of the board and a majority of shareholders of each corporation, and a copy of the
merger plan must be provided to the shareholders of each corporation pr
ior to voting.

ii.

Shareholders who disagree with fundamental corporate changes may have dissenters' or
appraisal rights. The corporation must pay dissenting shareholders the fair value of their stock
in cash.

a.


Under the RMBCA, an existing right of appraisa
l may be invoked only when a shareholder
has a right to vote on a fundamental change, does not vote in favor, and gives written
notice of a demand for payment.

b.

Fundamental change include an amendment to the articles that materially and
adversely affects

rights in respect of a dissenter's shares because it alters or abolishes
a preferential right.

c.

Appraisal rights may also derive from a merger of the corporation into its parent, the
sale or exchange of substantially all of the property of the corporatio
n in a transaction
not in the ordinary course of business, and consummation of a plan of share
exchange to which the corporation is a party as the corporation whose shares will be
acquired.


Remember:


1.

A merger, consolidation, or purchase of substantiall
y all of a corporation’s assets requires approval
of the board of directors of the corporation whose shares or assets are acquired.

2.

An acquiring corporation may bypass board approval by extending a cash tender offer directly to
shareholders to purchase a c
ertain number of the outstanding shares.

3.

After obtaining control of the target corporation, the tender offeror may effect a merger or
consolidation.


3.

The RMBCA

permits voluntary dissolution of a corporation that may be voluntarily dissolved upon one
of th
e following occurrences:

i.

Unanimous written consent of all shareholders

ii.

Majority shareholder vote at a special meeting called for the purpose, if the directors have
adopted a resolution of dissolution.





23

ESSAYS

1.

Define
corporation

and list the major charact
eristics of a corporation.

2.

Describe the process of forming a corporation.

3.

Distinguish between publicly held and closely held corporations.

4.

Identify when promoters are liable on preincorporation contracts.

5.

Define
S Corporation

and describe its tax benef
its.

6.

Define
common stock

and distinguish among authorized, issued, treasury, and
outstanding shares.

7.

Describe the preferences associated with preferred stock.

8.

Describe the rights of debenture holders and bondholders.

9.

Describe the organization and opera
tion of multinational corporations.

10.

Describe the function of shareholders, directors, and officers in managing the affairs of a
corporation.

11.

Describe how shareholders' and directors' meetings are called and conducted.

12.

Distinguish between straight and cu
mulative voting for directors.

13.

Describe the agency authority of officers to enter into contracts on behalf of a
corporation.

14.

Distinguish how the management of close corporations differs from that of publicly held
corporations.

15.

Describe a director's and
officer's duty of care and the business judgment rule.

16.

Describe a director's and officer's duty of loyalty and how this duty is breached.

17.

Describe directors' and officers' liability insurance and corporate indemnification.

18.

Define piercing of the
corpora
te veil or alter ego doctrine
.

19.

Describe the function of shareholders, directors, and officers in managing the affairs of a
corporation.

20.

Describe how shareholders' and directors' meetings are called and conducted.

21.

Distinguish between straight and cumulat
ive voting for directors.

22.

Describe the agency authority of officers to enter into contracts on behalf of a
corporation.

23.

Distinguish how the management of close corporations differs from that of publicly held
corporations.

24.

Describe a director's and offic
er's duty of care and the business judgment rule.

25.

Describe a director's and officer's duty of loyalty and how this duty is breached.

26.

Describe directors' and officers' liability insurance and corporate indemnification.

27.

Define piercing of the
corporate ve
il or alter ego doctrine
.

28.

Describe the process for soliciting proxies from shareholders.

29.

Define
proxy contests
.

30.

Identify when a shareholder can include a proposal in proxy materials.

31.

Distinguish between a merger and a consolidation.

32.

Describe the proce
ss for approving a merger or share exchange.

33.

Describe dissenting shareholder appraisal rights.

34.

Define
tender offer
.

35.

Describe poison pills, white knight mergers, greenmail, and other defensive maneuvers
to prevent a hostile takeover.

36.

Apply the business
judgment rule in examining the lawfulness of defensive strategies.

37.

Analyze the lawfulness of state antitakeover statutes.




24

CASE STUDY

Dividends and Directors


Hypothetical


Description:

A board of directors declares a high dividend to ease the minds o
f investors. Some
stockholders believe the dividend is too large and violates state regulations.

Topic(s): Securities, Business Organization

Inter Corporation is a software company located in the state of Idaho. They are a public company
and currently have

200,000,000 shares of common stock outstanding bearing a $1 par value.
Additionally, Inter has 2,000,000 shares of 10% cumulative $5 par preferred stock outstanding
with no dividends in arrears. The company is run by a nine
-
person board of directors who m
eet
annually to determine the amount, if any, of the dividend for the year. On January 5, 2000, the
Board met for this purpose. They decided to declare a dividend of $21,000,000 to be distributed
in the amount of 20 cents to each of the preferred shares an
d the remainder to be split equally
among the common stockholders. At the time the company had a Retained Earnings account
which totaled $15,000,000 and an additional Paid in Capital account in the amount of
$50,000,000. The State of Idaho had a statute at

the time that limited the amount of dividends
that could be declared and paid to the amount shown in the Earned Surplus account.

The reason for the large dividend declared by the Board was to ease the minds of its steady
stockholder base. There had been r
umors that the company was having financial difficulties and
the dividend was declared partly to dispel these rumors and partly to continue the expected
constant dividend stream. The problem, however, was that the preferred stockholders claimed
that they d
id not receive the proper amount of dividends and that the entire dividend was illegal
in that it was too large.

The Board of Directors is worried about the possibility of a lawsuit and they ask your help in
answering the following questions:

1) Who is res
ponsible for the dividends declared by a corporation?

2) Did Inter’s Board declare an illegal dividend?

3) If we assume that the dividend declared was not illegal, was the amount assigned to the
preferred stockholders the correct amount?











25


Galilee

College ©

Chapter 5. Estates and Trust


A Formation and Purpose


Estate: Artificial legal entity that arises by operation of law when a person dies and immediately succeeds
to his to her property.

i.

Estate is liable for all debts of decedent


1.

To form
inte
r vivos

trust to hold personal property, trust must be specific concerning property to be held
in trust.

i.

Spendthrift Grantor must deed property to trustee

a.

Prohibits beneficiaries from voluntarily transferring their interests in trust assets

b.

Creditors of be
neficiaries of a spendthrift trust cannot reach trust assets in hands of trustee

c.

Creditors may petition court to order payment


2.

Express trust is formed when a settlor, with intent to form trust, transfers legal title to at least one
trustee for the benefit

of at least one beneficiary.

i.

A successor trustee is not necessary


3.

Resulting trust is one which arises by operation of law. Its an implied turst when beneficial interest has
not passed to a beneficiary other than the trustee. This is created by

i.

Express

or charitable trust fails

ii.

Trust purpose has been performed, but some trust property remains

iii.

Buyer makes installment payments to seller while title to property is held by third person


4.

Testamentary trust is one provided for in the settlor’s will to become
effective upon that person’s death.

5.

Constructive trust arises by operation of law as a remedy to prevent unjust enrichment.

6.

Charitable trust is a trust established for charitable purposes only. It is usually categorized as for relief
of poverty, aid to ed
ucation, advancement of religion.

7.

Totten trust is a saving account for which the depositor executes a document declaring that he or she is
the trustee of the account for the benefit of another.

8.

Real Estate Investment Trust (REIT) is a trust that owns real
estate or loans secured by real property
and is managed for beneficiaries. A REIT has at least 100 beneficiaries who own transferable shares.
An initial offering of interests in a REIT must be registered under the Securities Act of 1933.

9.

Honorary trust i
s a trust, not set up for charitable purposes, having no private individuals as
beneficiaries. Examples are trusts formed for maintenance of a cemetery plot or pets.


B. Allocation Between Principal and Income

A.

Rules to Apply
. Receipts and dis
bursements of a trust or estate must be allocated between principal
and income accounts.


1.

State law defines what is principal and what is income. Many states have adopted the Revised
Uniform Principal and Income Act, some with modifications.



26



2.

The act provides that trust instrument designations of principal and income control, and it provides
designations that control to the extent a trust is silent.



3.

Frequently a trust instrument provides for trust income to be

distributed to others.



a.

Income beneficiaries are often referred to as life estates, and beneficiaries entitled to trust
property after expiration of the prior interest are called remaindermen.


B.

Principal Receipts
. Principal
includes property transferred gratuitously to the trust and any changes in
that property's form. Principal is property held to be delivered eventually to the remaindermen (unless
the terms of the trust specify otherwise). The act generally allocates the fo
llowing receipts to principal:



1.

2.

3.

4.

5.

6.

7.

8.

Consideration for principal, including gain on sale

Replacement property acquired with principal

Insurance proceeds for loss of principal

Stock received in a stock split

Nontaxable s
tock dividends

Stock rights in a corporation distributing them

Liquidating dividends

Gain attributable to acquiring bonded debt at discount


C.

Disbursements from Principal
. Extraordinary expense (not ordinary and current) is allocated to
pr
incipal, e.g., costs to set up the trust, purchase and sell investments, or improve trust property. The
act, generally, allocates the following to principal:


1.

Capital costs


a.

b.

c.

Major repairs

Modifications

Local assessment
s for improvements


2.

3.

4.

5.

6.

Payments on debt principal

Tax on principal items, e.g., capital gain

Fiduciary fees

Amortization of an investment the trustee purchased at a premium

Distribution to principal beneficiary


D.

I
ncome Receipts
. Income is the return (in money or property) on or from the use of principal. Income of
a trust or an estate is narrower than income for financial or individual income tax purposes. Receipts
allocated to income under the act include the foll
owing:



1.

2.

3.

4.

5.

6.

7.

8.

Business income

Rents, including prepaid rent

Insurance proceeds for lost profits

Interest, including all interest on bonds acquired at a premium

Discount gain on redemption of treasury bills

Taxable divide
nds of cash or property

Taxable stock dividends

Extraordinary dividends


27


E.

Disbursements from Income
. Ordinary and current operating and administrative expense is charged
against income. The act, generally, allocates the following costs to i
ncome:



1.

2.

3.

4.

5.

6.

7.

8.

Business expense, ordinary and necessary, e.g., interest

Production of income costs, e.g., rent collection fee

Insurance premiums

Maintenance and repair of trust property

Tax on fiduciary income

Trustee ins
urance bond premiums

Ordinary loss passed through from a partnership

Depreciation


F.

Specific Items




1.

The act provides that
depreciation

be a required charge against income unless the trust instrument
provides otherwise. Many
state statutes grant the trustee discretion to determine whether to
recognize it at all.


a.

Depreciation charged against income preserves principal.


2.

Stock
. Undistributed earnings of a corporation are not income.


3.

Annuity
. The proceeds are partly allocable to principal and partly to income (interest).


4.

Bonds
. The act does not require that bond discount or premium be amortized or specifically
allocated. Stated interest is allocated to income. Gain or
loss attributable to discount is allocated to
principal.



State law defines what is trust principal and what is income. I
ncome
is return on or for the use of
principal.

i.

Receipts and disbursements of a trust or an estate must be allocated between princi
pal and
income accounts.

ii.

Receipts representing change in form or return of principal and extraordinary disbursements are
allocated to trust principal.



Trust instrument may designate an item as chargeable to trust principal or income.



Unless trust instrumen
t specifies otherwise, designation by the Uniform Principal and Income
Act applies

iii.

Trust principal is property gratuitously acquired and any changes in its form, held for eventual
delivery to remaindermen.


C.

Fiduciary Responsibilities



The Person
al Representative
. The responsibility of the personal representative is to administer the
estate of the decedent in accordance with legally valid instructions as expressed in the testator's will or
in accordance with the appropriate statute governing intes
tate succession.



1.

Typically, a person is qualified to act as a personal representative if (s)he


a.

b.

Is over 18 years of age

Has never been convicted of a felony


28

c.

d.

Has the appropriate mental capacity

Is a resident of th
e state of administration

The personal representative is responsible to administer the estate according to legal directions. He or she
is a fiduciary with respect to the estate and must act primarily for the benefit of the estate.

i.

Is accountable for est
ate assets

ii.

Must keep estate property from his or her own

iii.

Must exercise the same degree of care and skill in holding, managing, and administering trust
property as would reasonably prudent persons in managing their personal affairs.

iv.

Trustee owes duties of r
easonable care and undivided loyalty to the trust and its beneficiaries

a.

Has the power to sell trust property and pay trust expenses

b.

Trustee can be removed by petition by beneficiaries in court


D.

Distributions and Terminations

The personal representative, to

the extent of the probate estate and consistent with law, pays claims
against the estate and then distributes remaining assets as directed by the terms of a valid will.

1.

Distribution of the probate estate, net of claims against the estate and security inte
rests in probate
assets, is according to intent expressed in a valid will, if there is one.

i.

Per Capita

means that all persons within the stated degree of relationship to the decedent take
equally, without regard to representation.

2.

The distribution of the p
roceeds of a probate estate is according to the decedent’s intent, if expressed;
otherwise, as directed by the statute.

i.

The general rule is that property not specifically distributed by will is divided equally among the
children of the decedent living at t
he time of his or her death, with the share of any
predeceased child divided equally among the children of such predeceased child.



This type distribution is taking by representation, or per stirpes.



An alternative distribution is when lineal decedents are
to receive an equal share regardless of
generation.

3.

When a person dies intestate (without a will) their property passes under a statutory will called an
intestacy statute. Each state has an intestacy statute. Some variations exist but priority is invar
iably
given to surviving spouses and children of the decedent.

4.

A probate estate is defined as all property of a decedent that pass under the terms of his or her will or
the intestacy statute of the state wherein decedent resided.

i.

Trust is terminated if tru
st term expires

ii.

A trust will terminate on a specific date



Upon the ocurrence of a specific event, or



Impossibility or illegality of carrying out the trust purpose.


5.

Gifts are sometimes made to children or relatives as an advance on their share of the donor
’s estate.

i.

Such a gift will only be considered an advancement if the donor clearly evidences the intent to
reduce the beneficiary’s share of his or her estate.









29

RESEARCH QUESTIONS

1.

List and describe the requirements for making a valid will.

2.

Describe
how a will can be revoked.

3.

Describe a holographic will.

4.

Define
ademption

and
abatement
.

5.

Describe how property is distributed if a husband and wife die simultaneously.

6.

Describe the effect of entering into a mutual will.

7.

Identify how property is distrib
uted under intestacy statutes if a person dies
without a will.

8.

Describe the process of probate.

9.

Describe a living will.

10.

Define
trust

and identify the parties to a trust.

11.

What are two ways in which a will can be revoked?

12.

List and describe three types of

testamentary gifts.

13.

Explain the difference between joint wills and mutual wills.

14.

List at least five elements which the courts determine the presence of undue
influence.

TRUE or FALSE

1.

People are said to have testamentary capacity if they are of legal age a
nd "sound
mind."

2.

Generally, wills can be oral as well as written.

3.

The person who makes the will is the testator or testatrix.

4.

Wills cannot be changed once they are made.

5.

Wills cannot be revoked.

6.

Holographic wills can be made in pen, pencil, crayon, or any
other type of writing
instrument as long as it is in the testator's own handwriting.

7.

A person can renounce an inheritance when liens or mortgages against the
property exceed the value of the property.

8.

The principal of ademption applies when a testator leav
es insufficient property to
satisfy all the debts.

9.

When the lineal descendants equally share the property of the estate without
regard to the degree of relationship to the testator, it is called
per stirpes.

10.

To prevent unwarranted will contests, a testator

can use a videotape or
electronically recorded will to supplement a written will.

11.

Under the Uniform Simultaneous Death Act, each deceased person's property is
distributed as though he or she survived.

12.

The property held in a trust is called the trust impro
mptu.

13.

Trusts may be implied as well as expressed.

14.

A constructive trust is created by the conduct of the parties





30



Galilee College ©

Chapter 6. Contracts


A. Offer and Acceptance


Essential elements of a Contract (COMALL)

C


Consideration (bargained
-
f
or exchange)

O


Offer

M


Mutual Assent (meeting of the minds)

A


Acceptance

L


Legality (legal purpose)

L


Legal Party (legal ability)


1.

An offer is a statement or other communication by which the offeror confers upon the offeree the power
of acceptanc
e (to form an agreement) An offer need not take any particular form, but it must:

i.

Be communicated to an offeree

ii.

Manifest, objectively, an intent to enter into a contract

iii.

Be sufficiently definite and certain.


2.

To have legal effect, an offer must manifest a
n intent to enter into a contract. Newspaper
advertisements that merely cite prices on items in stock are invitations to negotiate, not offers.

i.

an advertisement may be so definite and manifest such clear intent that it constitutes an offer
and not a solic
itation of offers,

ii.

Rejection of an offer terminates it.

iii.

An offeree cannot accept an offer after rejection is effective.

iv.

An attempted acceptance after rejection is a new offer.


3.

A revocation of an offer is effective when received by the offeree.

i.


Receipt

occurs when the revocation comes into possession of the offeree or his/her agent, or
when it is delivered to his/her office.

ii.

A rejection must actually be received to be effective.



Only an acceptance can be effective upon dispatch.

iii.

An attempt by the offe
ree to vary an offer operates as a rejection that terminates the offer and
a counteroffer.

iv.

An offeror has the power to revoke (cancel) an offer at any time prior to acceptance.
Exceptions arise when there is an option contract or a merchant of goods makes

a written
commitment to keep an offer open.

v.

To be effective, revocation must be communicated to the offeree prior to acceptance.


31

vi.

Notice of revocation may be indirectly communicated. Sale of the subject matter was an
exercise of the power of revocation.

vii.

Prior to effective acceptance, an offeror may revoke the offer by words or conduct.



An offer is also terminated by operation of law under certain circumstances.

a.

Death or incompetence of either the offeror or the offeree generally terminates the
power of

acceptance. But it does not terminate an offer contained in a valid option
contract.


4.

The offeror is the master of the offer. To the extent (s)he expressly limits what constitutes effective
acceptance, it is limited under both common law and the UCC.

i.

The
mailbox rule operates only to the extent the offer does not expressly provide for a different
result.

ii.

When an offer states that silence is an acceptance, the offeree may accept by remaining silent
if the offeree intends the silence to be acceptance.

iii.

Unles
s an offer expresses otherwise, an acceptance by the same means used to transmit the
offer is effective upon dispatch.

a.

Communication by another mode effects acceptance, if at all, upon receipt by the offeror.

b.

If the offer specifies a time for it's termin
ation, it terminates at that time. Thereafter, it
cannot be effectively accepted.



Consideration

Consideration is something of value given in a bargain
-
for exchange, when the parties intend an exchange.
Two elements must be present to satisfy the

consideration requirement: Legal sufficiency and bargained
-
for exchange.

1.

A promisee has provided legally sufficient consideration if (s)he incurs a legal detriment or if the
promisor receives a legal benefit.

i.

The consideration provided by one party (the
promisee) to support the enforceability of the other
party's (the promisor's) promise may be a bargained
-
for legal detriment to the promisee or a legal
benefit to the promisor.

ii.

Consideration is always in the form of a promise, act, or forbearance.

iii.

Common
law requires that a material modification to a contract be supported by new
bargained
-
for consideration.

iv.

A promise unsupported by consideration is unenforceable. Consideration must be legally
sufficient and provided in a bargained
-
for exchange.

a.


Legal suff
iciency is found in the promisee's incurring a legal detriment or the promisor's
receiving a legal benefit. The debtor's promise to pay part of a disputed liability
incorporates legally sufficient consideration


2.

A requirement for enforceability of an agree
ment is legally sufficient consideration, or a substitute for it.

v.

One substitute is promissory estoppel:



A promise that induces action or forbearance, which the promisor should reasonably have
expected, is enforceable absent consideration if it is the on
ly way to avoid injustice.



This doctrine has been applied to promises to charitable organizations.

vi.

A contract is not valid and enforceable unless there has been legally sufficient consideration
for the exchange of promises or acts between the parties



Past

consideration is treated the same as no consideration.


32



Promises made out of a sense of honor or moral obligation are not enforceable if they lack
the bargain element



In a bilateral contract, each promise acts as the consideration for the other.