Business law Exam 3 Review

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REVIEW FOR EXAM #3 – FIL 185
SPRING 2015
General
60 m/c questions, worth 300 points, covering Property, Agency, Business
Associations and Products Liability. Questions from issues decided in cases
we have covered will also be on the exam.

Property
If real property is land, what is personal property? What is a
fixture?
Personal property is property owned by an individual or business which is
movable and is not affixed to or associated with the land. Personal property
can be tangible or intangible. Fixtures are property physically attached
to real estate. (furnace, chandelier, trees)
Ex: Tangible - a penny, TV, Truck / Intangible - share of corporate stock,
copyright
What is lost property? What is mislaid property? What is abandoned
property?
Lost Property is personal property that an owner has accidentally parted
with possession of. OWNER DOES NOT KNOW HE/SHE LOST IT! If found, it is
“finder’s keepers” except as to the true owner.
Mislaid Property is personal property placed Intentionally somewhere by
the owner who forgets where he/she put it. May be kept by the OWNER of
the place where the property was mislaid except as to the real owner.
Abandoned Property is personal property intentionally GIVEN UP of his/her
possession. Whoever takes possession gets to keep it even as to the original
owner.
In what ways can personal property be transferred?
Two ways: by Deed or upon death, by Devise or Descent
Deed is a written document that must have these 5 components. The
identities of the GRANTOR and the GRANTEE, Words of CONVEYANCE,
legal description of the land, covenants of TITLE (promise made by grantor
to grantee regarding title being given), and the signature of the Grantor.

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Warranty Deed - Grantor promises he-she has full ownership and power to
convey, no one else has an interest in the land, no one else has the right to
kick the grantee of the land. Best kind of deed for a Grantee.
Quitclaim Deed - Grantor only conveys whatever interest he/she has in the land, even
if it is NONE. There is no guarantee that someone else may come along to claim
ownership. After a Deed is signed and delivered, it must be RECORDED at the recorder of
the Deeds office. Why? To put other on NOTICE that the transaction took place.
Upon death, by Devise or Descent - if owner of land dies and leaves a Will, the land will be
transferred to the person(s) named in the Will. Called DEVISING property to the heirs or
others named in the Will. If an owner of land dies WITHOUT a Will, land is transferred
under the State’s law of DESCENT AND DISTRIBUTION (Usually, surviving spouse,
parents, brothers, sisters, etc.)
Adverse Possession - Is done without agreement and without the consent of the owner. If
some person other than the owner claims ownership of the actual owner’s land for at least
20 years, and does so, Actually, Visibly, Openly, Notoriously, Exclusively, and
Hostilely then, the land can be owned outright.The real owner can usually protect his/her
rights to stop the clock on adverse possession by simply telling the adverse possessor that
he has “permission to use the land, but not as an adverse possessor!

What is a bailment for the sole benefit of the bailor? What is the
standard of care?
What is a bailment for the sole benefit of the bailee? What is the
standard of care?
What is a mutual benefit bailment? What is the standard of care?
What is the name of the person who leases land to another?
What is the name of the person who leases land from another?
What is a leasehold estate? What is a lease?
If a person dies with a will, how do his/her heirs get the property?
Without a will?
What is the implied warranty of habitability? What is eviction? What
is constructive eviction?
What does a patent protect? What does a copyright protect? What
does a trademark protect?
Does the Statute of Frauds apply to contracts for the sale of land?
How does joint tenancy work? How does tenancy in common work?
What are fungible goods?
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Fungible goods - Means your stuff and my stuff are all mixed together and
it is the same KIND OF STUFF. Each person owns a proportionate share of
the whole as TENANTS IN COMMON.
What does the “fair use doctrine” protect? (CASES)
What is the formula for “diminution of value”? (CASE)

Agency
What are the differences between master-servant relationships and
principal-independent contractor relationships?
Principal-Independent Contractor relationships – person who hires an independent contractor
has NO control over his/her conduct in the performance of the contract. The method and manner
of doing the job is up to the independent contractor. (e.g. your taxi driver is an independent
contractor)
Employer-Employee relationships – the employer (also known as the MASTER) has the right
to CONTROL the conduct of his/her employee (also known as the SERVANT). (e.g. a full-time
chauffer is an employee). Employers are generally responsible for their employee’s torts.
In what ways can an agency be created? In what ways can an
agency be terminated?











CREATED – 5 WAYS
o By agreement – can be by written contract or verbally.
 Exception: the EQUAL DIGNITY RULE. If the underlying purpose
for creating the agency requires a written contract, the agency itself
requires a contract. (e.g. if it is a sale of land, then your agreement with a
real estate agent must be in writing)
 All MYLEGS are exceptions
By ratification – if a person performs an act on behalf of a principal without authority to
do so AND the principal later agrees to by bound by the act. (e.g. a retail employee sells
a product at ½ price before it goes on sale and the store owner later says that was OK)
By estoppel – binds a principal to the acts of an agent even though no actual agency
exists! This occurs when:
o The principal creates the appearance that an agency has authority to act AND
o A third party, in good faith, reasonably relied upon this apparent authority AND
o The third party changed its position to its detriment in reliance on the apparent
authority of the agent.
By apparent authority – if a principal places a person in a position where it reasonably
appears to a third party that an agent has authority to act, then the principal is bound by
the acts of the agent.
By operation of law – requires NO overt act or agreement by the parties involved.
HOW AGENCIES CAN BE TERMINATED – 4 WAYS
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Lapse of time – Agency ends at a set period of time or, if not known, then after a
reasonable period of time. If neither apply, then it is an AGENCY AT WILL which can
be terminated by either party at any time.
By agreement – agent renounces and principal revokes agency relationship and if
neither objects, the agency terminates by agreement.
o Exception: AGENCIES COUPLED WITH AN INTEREST.
Accomplishment of purpose – EASY. When purpose of agency is done, so it the
agency.
By operation of law – Death, incompetency, destruction of subject matter or subject
matter becomes illegal.
NOTE: when agencies are terminated, the principal MUST advise 3rd parties that
the agent no longer has authority to act on his/her behalf !!! Risk for failing to do
this? Apparent authority!

A fiduciary relationship is best characterized as a relationship of
_Agent__(employee)_____ and __Principal (employer)_____.
Agencies coupled with an interest cannot be
_Terminated______________________.
What is the legal term for “let the superior respond”? If applied
under the law, who is liable for the negligent acts of the servant?



RESPONDEAT SUPERIOR – “LET THE SUPERIOR RESPOND”
The master is responsible for the torts of his/her servants when the torts are committed
while the servant was acting within the scope of employment. Sometimes called
VICARIOUS LIABILITY. The servant, the master or BOTH can be sued
o To determine if Respondent Superior applies, two inquiries must be made:
 Who is a “servant”?
o b) A servant is an agent employed by a master to
perform service in his affairs whose physical conduct
in the performance of the service is controlled or is
subject to the right to control by the master.
 What is an “act within the scope of employment”?
 Servant, within scope of employment
o a) The kind he is employed to perform; occurs
substantially within the authorized time and space
limits; is actuated, at least in part, by purpose to
serve the master; if force is intentionally used by the
servant against another, the use of force is not
unexpectable by the master.
 Kind of conduct within the scope of employment:
o a) Conduct must be the same general nature as that
authorized, or incidental to the conduct authorized.
o b) Conduct that is incidental: act is one that is
commonly done by such servants; extent of
departure from normal method of accomplishing an
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authorized result; whether or not the act is seriously
criminal.
What is a “frolic and detour”? Who is liable as a result? Who is
liable for just a “detour”? (CASE)
FIOCCO v. CARVER – the Court had to determine whether an employee was acting
within the scope of his employment or was he on a “FROLIC AND DETOUR”.
Affirmed frolic and detour for the driver of the truck and he killed the
kid.
 Facts: D's driver sent to deliver truckload of goods but after delivering
went to mom's house, carnival, etc. and through his negligence injured
a kid riding on his truck.
 Ruling: A major departure from the duty will take an agent outside the
course of employment and subject him to sole liability. The test is
whether the agent's dominant purpose was the departure or the duties
of employment.
 FROLIC AND DETOUR- If it is outside the scope of employment then the
master is not liable, Master is only liable when the employee is acting
within the course of his employment.
In what ways might a master “control” his/her servant?




Could prevent him from taking other employees upon exit, competing
after leaving the principal’s employment.

Describe the various duties of loyalty that agents owe to their
principals.
Contract duties – if there is a contract, it controls the relationship
Fiduciary duties – 5 duties: COLAN
 Care – Agent must use due care when using Principal’s property.
 Obedience – Agent is required to act only as directed by the Principal.
 Loyalty – BIGGY!! Agent cannot serve two principals at the same time.
Could be a conflict of interest. An agent CANNOT:
o Compete with his principal
o Make a secret profit
o Steal business from the principal
o Divulge secrets
 Accountability – Agent must account for all money or property entrusted
to his/her care. Principal has a right to accounting at any time. Agent's
never mix company money with your own. Falls under this concept.
 Notice – Agent must let principal know about all material facts that come
to his/her attention w/ in a reasonable time.
What duties are owed by a principal to his/her agent?






Contract duties - if there is a contract, it controls the relationship
Duty to compensate – what was agreed to or what is reasonable for the type of work
performed
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Duty to reimburse and indemnify – if authorized by principal or where it is fair to do so.
Are duties of loyalty breached when an employee simply prepares to
open a new business in competition with his current employer?
(CASE)






MARYLAND METALS v. METZNER – the Court had to determine whether an
employee may begin preparations for a new business while still employed by the old
employer without breaching a duty of loyalty. Fiduciary duty of loyalty, can you make
preparations before leaving current employment? Yes, but exception to general. Does not
have right to make preparations using current employers resources and proprietary
resources or ideas.
GOLDEN NUGGET, INC v. HAM – the Nevada Supreme Court had to decide whether
a casino’s corporate board member/attorney breached his fiduciary duty of loyalty when
he secretly acquired land and leased it to the casino for a personal profit.

What is an “at will” employee? When is it illegal for an employer to
fire an “at will” employee?




If there is no definite time period contemplated in an agency relationship, then the
agreement will be deemed AT-WILL and either party may terminate the relationship at
any time.
But FAIR DEALING AND GOOD FAITH is still required of a principal under the law.
Even though the employment relationship is at will. If terminated for unfair or illegal
reasons, file wrongful discharge. Can't use this cause of action in court……
o Otherwise a claim for WRONGFUL DISCHARGE can be made under 3
situations:
 1. When the Agent is performing am important public duty, such as
performing important public service Military Service, Jury duty, elections.
 2. When the Agent “blows the whistle” on the principal for violating the
law
 3. When the Agent is exercising a legally protected right as demonstrated
in voting

Are all employees agents? Are all agents employees? If not, what
could they be?
GENERAL RULES:






1. All employees are agents.
2. Not all agents are employees
3. Agents who are not employees are independent contractors.
4. But, not all independent contractors are agents.
Principals are NOT generally responsible for an independent contractor’s torts.

What is the difference between an agency by apparent authority
and an agency by estoppel?
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By estoppel – binds a principal to the acts of an agent even though no actual agency
exists! This occurs when:
o The principal creates the appearance that an agency has authority to act
o A third party, in good faith, reasonably relied upon this apparent authority
o The third party changed its position to its detriment in reliance on the apparent
authority of the agent.
 By apparent authority – if a principal places a person in a position where it reasonably
appears to a third party that an agent has authority to act, then the principal is bound by
the acts of the agent.
To protect himself/herself, what should a principal do after an
agency is terminated?




when agencies are terminated, the principal MUST advise 3rd parties that the agent no
longer has authority to act on his/her behalf !!! Risk for failing to do this? Apparent
authority!

How do you know if someone is an independent contractor?




The person performs his/her work with very little direction by the
master as to detail
The person supplies his/her own tools
The person is performing a job that is NOT related to the master’s
business

Business Associations
What are the differences between partnerships and corporations?
partnerships













Two or more persons own the business
each has a share in the profits
partner must get a share of profits.
DEBTS – each partner is personally liable for the debts of the partnership.
TAXES – each partner is personally liable for the debts of the partnership.
PROPERTY OWNERSHIP – partnership owns as a legal entity, partnership can make
contracts and hold assets in its own name.
JOINTLY AND SEVERALLY LIABLE. RESPONDEAT SUPERIOR applies!! The
partnership is liable for the torts of its partner. Partners have UNLIMITED LIABILITY
for the debts of the partnership, only dissolved upon Death, insanity, bankruptcy,
withdrawal or expulsion of a partner.
limited partner is liable to partnership creditors only to the extent of his/her investment
in the firm.
NO CONTROL over the management of the partnership!
The LIMITED partners get paid off before the GENERAL partners do upon dissolution.
creditors of the partnership still get paid off before the LIMITED partners!
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CORPORATIONS






They can sue or be sued.
They can be charged with crimes.
They must pay their own debts.
They can file for bankruptcy.
They are protected by the 4th Amendment against unreasonable searches and seizures.

What is a domestic corporation? What is a foreign corporation?



Domestic corporation – created in the State where it engages in business.
Foreign corporation – created in a State other than where it engages in business. It must
get permission to do business in other States. Permission is usually granted by that
State’s Secretary of State’s office - for a fee.

When can a shareholder sue on behalf of the corporation? What is it
called?




Direct action – individual shareholder sues on his/her OWN BEHALF to obtain
dividends, examine the books, etc. The Defendant can be the corporation itself or the
Board of Directors.
Derivative action – filed by shareholders to seek a remedy ON BEHALF OF the
corporation. It is the corporation that is injured – not the stockholder. (e.g. the corporate
president is stealing profits)

What is the “business judgment rule”? (CASE)




BUSINESS JUDGMENT RULE – officers and directors acting in good faith and without
a corrupt motive will NOT be held liable for honest mistakes of judgment and a
shareholder’s judgment will NOT be substituted for the officer’s or director’s judgment.
TRECO v. LAND OF LINCOLN – the Court must determine if the action of the Board of
Directors was permissible under the Business Judgment Rule. AFFIRMED (FAVOR OF
LAND OF LINCOLN).

When will a court “pierce the corporate veil” to hold a shareholder
liable for a tort? (CASE)




Stockholders have very limited liability – measured by the extent of funds they have
invested in the corporation, UNLESS the corporation formed merely to protect FRAUD
or justify WRONGDOING. If so, the Courts may PIERCE THE CORPORATE VEIL.
WALKOVSZKY v. CARLTON – the Court must determine whether or not to “pierce
the corporate veil” and impose personal liability on the shareholder. In favor of
Walkovszky (Plaintiff). Carlton is cooperation, he split up ownership of cab companies
among other companies, but he had a holding corporation who own all the cab
companies, therefore ultimately liable when one cab hits someone, like in this case.

What are the differences between equity financing and debt
financing?
8





Equity Financing – sale of STOCK in the corporation. Shares of stock that are for sale
are called ISSUED SHARES. Those purchased are called OUTSTANDING SHARES.
Unsold shares are called TREASURY SHARES. # of shares determined by corp. by
laws.
Debt Financing – issue BONDS or BORROW money from banks. The owner of debt
securities has NO ownership interest in the corporation, has no shares of stock, and gets
no dividends. Instead, the debt securities owner has the right to receive INTEREST on
the re-payment of the money borrowed.

What is a sole proprietorship?


Just one person, no special government filings, debts owed by owner personally, at death
the sole proprietorship ends.

What is the “jingle rule”?


JINGLE RULE – partnership creditors get paid out of partnership assets. Individual
creditors get paid out of individual assets. If partnership assets are not enough to pay
partnership creditors, THEN partnership creditors have to stand in line behind the
individual creditors before they can get individual partner’s assets. If an individual
partner’s assets are insufficient to pay the individual partner’s creditors, THEN the
individual partner’s creditors have to stand in line behind the partnership creditors before
they can get partnership’s assets. 4 parts to it. Not split up well.

Who gets paid first when a partnership is “wound up”?


Death, insanity, bankruptcy, withdrawal or expulsion of a partner
o Once dissolved, the partnership must proceed with WINDING UP its affairs by:
Paying off debts and Distributing remaining assets (if any) to the surviving
partners
o The GENERAL partners continue to have full, unlimited liability. If the
partnership DISSOLVES, the LIMITED partners get paid off before the
GENERAL partners do. HOWEVER, the creditors of the partnership still get paid
off before the LIMITED partners!

Who “owns” a corporation? Who makes the policy decisions? Who
manages the day-to –day affairs?




Stockholders actual “own” a corporation. They meet annually to discuss business and
elect or re-elect a Board of Directors. The Board of Directors manages the corporation.
Board hires OFFICERS to do the day-to-day management. Officers can be fired by
board.
Each share of stock represents ONE VOTE. Shareholders must vote to elect the Board of
Directors or to do anything!

How do “preemptive rights” work for a current shareholder?
9





PREEMPTIVE RIGHTS – protects EXISTING stockholders from having their
corporate interest diluted. The law permits existing stockholders to buy a proportionate
share.
Example: 100 shares can be sold to the general public. Board authorizes sale of 100, you
buy 10 shares, therefore you own 10% of the company. A few years go by, the corp. is
going to issue 20 shares of stock, if they were sold to someone else, now your ownership
interest is diluted. % of interest in the company is now diluted. How to keep this from
happening. An existing shareholder has the right to buy the proportion of existing shares
of the company. If they are selling 20 more shares, therefore you have the right to buy 2
shares to keep your 10% interest intact.

Identify some examples of adequate contributions to a partnership?
(CASE)
Two or more persons own the business, each has a share in the profits, best created by written
contract. To be a partner must get a share of profits. What constitutes a profit? Without a written
contract, you can get into some real messy problems . . . . . .
CUTLER v. BOWEN – the Court must determine whether a partnership exists entitling Cutler
to receive ½ of the profits. City approached Mr. Bowen to bulldoze the building for 10 grand.
Sells it and pockets it. Sues for 5 grand, trial court rules for Cutler. Issue: Under oral agreement
are they partners? Ruling: affirm, partners. Findings: Bowen was receiving a cut of the profits.
Cutler was shouldering responsibility to hire and fire and do the books. Should always put it in
writing.
What does the term “ultra vires” refer to?


The corporation may now do business in that State. They have whatever powers given
them by the Articles of Incorporation. Any action taken outside of the Articles of
Incorporation is ULTRA VIRES or illegal.

Products Liability
Name two defenses to strict liability claims.
ASSUMPTION OF THE RISK – if consumer knew of danger, then no recovery.
STATE OF THE ART – it is unfair to apply today’s safety and technology to yesterday’s
products.
Is “reasonableness” a defense to strict liability? (CASE)
Berkbile v. Brantley Helicopter , no reasonableness does not apply, because duty or breach or
duty does not need to be proven. Just the that there is a defect and it is not tort negligence. Prove
it is defective and that it hurt or injured or killed the plaintiff.
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Under Mag-Moss, identify two kinds of warranties. How do they work?
FULL WARRANTY - seller must repair product for free w/ in a reasonable time or buyer gets
money back. Cannot be limited in time.
LIMITED WARRANTY – all other warranties. No implied warranties can be disclaimed!
However, limited warranties can be limited in TIME as long as the terms are CONSPICUOUS
on the warranty card.
What agency protects consumers against unsafe products?
Consumer Product Safety Commission which develops safety standards. It has authority to
BAN consumer products if totally unsafe, go to court to seize unsafe products off of store
shelves, and force recalls, repairs, replacements, and refunds.
FEDERAL FOOD AND DRUG ACT – has authority to regulate manufacture and sale of food,
drugs and cosmetics. It can make rules, inspect plants, seize and destroy contaminated products,
and establish standards for food purity.
Under common law, what legal doctrines prevented consumers from recovering damages
for injuries caused by defective products?
CONSUMER PRODUCT SAFETY ACT (CPSA) – regulates ONLY consumer products sold
for personal uses and enjoyment. It does not regulate food, drugs, make-up or insecticides.
Passed by Congress, enforced by the Consumer Products Safety Commission. Commission has
authority to make rules, after someone perishes using a product is required to review it and goes
into Federal register.
What does the “alternative liability” theory do in a products liability case? (CASE)
SINDELL v. ABBOTT LABS – the Court considered whether alternative liability permits a
plaintiff to shift the burden of proof to the defendants.It is now legal to sue pharma companies,
and do not need to identify the culpable company. Court didn’t care that they couldn’t pinpoint
the exact company.
How does the implied warranty of merchantability protect consumers?
Implied warranty of merchantability – BIGGY. Seller promises goods being sold are fit for
ordinary purposes for which the goods are used.
Exceptions: 1) Implied warranties only apply to MERCHANTS – not people who have garage
sales! 2)Implied warranties only apply for ORDINARY uses – a household toaster is warranted
for use in the home, not a restaurant.
Does Mag-Moss require manufacturers to have warranties? What does it require?
Mag-Moss did NOT expand products liabilities provided by law. Only requires sellers of goods
to clearly disclosed what IS being warranted. Law does NOT require that warranties be given AT
ALL! If provided by a seller, warranties now have to be either: FULL WARRANTIES or
LIMITED WARRANTIES
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Which warranties can be disclaimed? Which warranties cannot be disclaimed?
No implied warranties can be disclaimed! However, limited warranties can be limited in TIME
as long as the terms are CONSPICUOUS on the warranty card.
How does the “implied warranty of fitness for a particular purpose” work? Who do you
think would want such a warranty from a manufacturer?
Implied warranty of fitness for a particular purpose – applies if the seller KNOWS of the
buyer’s specific requirements for the product AND the buy relies on the seller’s expertise in
choosing the product. (e.g. commercial dryers in laundromats). Companies would want these
type of warranties.
What authority does the Consumer Product Safety Commission (CPSC) have with respect
to unsafe products? Does the CPSC have the authority to make whatever standards they
want to prevent injuries? (CASE)
CONSUMER PRODUCT SAFETY ACT – regulates ONLY consumer products sold for
personal uses and enjoyment. It does not regulate food, drugs, make-up or insecticides. It
created the Consumer Product Safety Commission which develops safety standards. It has
authority to BAN consumer products if totally unsafe, go to court to seize unsafe products off of
store shelves, and force recalls, repairs, replacements and refunds.
What is the Food and Drug Administration required to do with respect to cancer causing
products? FEDERAL FOOD AND DRUG ACT – has authority to regulate manufacture and
sale of food, drugs and cosmetics. It can make rules, inspect plants, seize and destroy
contaminated products, and establish standards for food purity. BIG AREA OF CONCERN CANCER FDA may BAN any food product on the market that has been found to induce cancer
in animals or humans – even if ONLY 1% of animals tested showed signs of cancer after
ingesting the food. This is known as the ZERO TOLERANCE RULE.
One exception: saccharine (sugar substitute)

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