Legal and Social Environment of Business

1. Introduction to Law
a. Origins of Law
i. The doctrine of precedent, which developed gradually over centuries, requires that
judges decide current cases based on previous rulings.
1. It is beneficial because it ensures predictability in the court system
ii. The accumulation of precedent, based on case after case, makes up the common
law
iii. The legal environment of business is defined as: the attitude of the government
toward business, the historical development of this attitude; current trends of
public control in taxation, regulation of commerce and competition; freedom of
contract, antitrust legislation and its relationship to marketing, mergers and
acquisitions; and labor management relations.
b. Sources of Contemporary Law
i. The United States Constitution
1. Branches of Government
a. Legislative
i. Gives the ability to create new laws
ii. 2 Chambers, Senate and House of Representatives
b. Executive
i. Authority to enforce laws
c. Judicial
i. Gives the right to interpret laws and determine their validity
2. Statutes
a. Laws created by a legislature
3. Common Law
a. The principle that precedent is binding on later cases is called stare
decisis, which means “let the decision stand”
b. Stare decisis makes the law predictable and this, in turn, enables
businesses and private citizens to plan intelligently
c. Precedent is binding only on lower courts
4. Administrative Law
a. Agencies have the power to create laws called regulations
c. Classifications
i. Criminal and Civil Law
1. Criminal law concerns behavior so threatening that society outlaws it
altogether
2. Civil Law regulates the rights and duties between parties
d. Jurisprudence – The philosophy of Law (NOT ON EXAM)
i. Legal Positivism
1. Simply stated: Law is what the sovereign says it is
a. Sovereign is the recognized political power whom citizens obey
ii. Natural Law
1. An unjust law is no law at all
iii. Legal Realism
1. Who enforces the law counts more than what is in writing
e. Conclusion
 i. We depend upon the law to give us a stable nation and economy, a fair society, a
safe place to live and work.
ii. Primary Sources of Law
1. US Constitution and state constitutions
2. Statues, which are drafted by legislatures
3. Common law, which is the body of cases decided by judges as they follow
earlier cases, known as precedent
4. Court orders, which place obligations on specific people or companies
5. Administrative law, which are the rules and decisions made by federal and
state administrative agencies; and
6. Treaties and agreements between the US and foreign nations
2. Ethics and Corporate Social Responsibility
a. Introduction
i. Ethics is how people should behave
ii. Life principles are the rules by which you live your life
1. Research shows that people who think about the right rules for living are
less likely to do wrong
iii. No matter what you say, every ethics decision you make illustrates your actual life
principles
iv. Ethics in Business
1. Milton Friedman
a. Said that a corporate manager’s primary responsibility is to the
owners of the organization, that is, to shareholders
2. Stakeholders include anyone who is affected by decisions made by the
corporation
3. A company with a good reputation can pay employees less and charge
customers more
b. Theories of Ethics
i. Utilitarian Ethics, John Stuart Mill
1. A correct decision is one that maximizes overall happiness (utility) and
minimizes overall pain, thereby producing the greatest net benefit
2. Critical
a. Critics argue that it is very difficult to measure utility accurately
b. Not all lives are of equal value to us
c. A focus on outcome can justify some really terrible behavior
ii. Deontological Ethics
1. Deontological is the Greek word for obligation
2. The duty to do the right thing, regardless of result
3. The ends don’t justify the means
4. Proponent Immanuel Kant, believed in the categorical imperative
a. An act is only ethical if it would be acceptable for everyone to do
the same thing
b. Also believed that human beings posses a unique dignity, and it is
wrong to treat them as commodities
c. The problem with Kant’s theory is that the ends do matter
d. Felt that any lie violated his principle of the categorical imperative
e. Kantian Evasion or palter: A truthful statement that is nonetheless
misleading
 iii. Rawlsian Justice
1. Life prospects: the circumstances into which we are born
2. Veil of ignorance: the rules for society that we would propose if we didn’t
know how lucky we would be in life’s lottery
3. Difference principle: Rawls’ suggestion that society should reward behavior
that provides the most benefit to the community as a whole
iv. Moral Universalism and Relativism
1. Moral universalism: A belief that some acts are always right or wrong
2. Moral relativism: A belief that a decision may be right even if it is not in
keeping with one’s own ethics standards
a. Cultural moral relativism
b. Individual moral relativism
i. The danger with individual relativism can justify about
anything
c. Ethics Traps
i. Money
ii. Competition
1. The mere process of negotiating the price of a product reduces a person’s
sense of morality
iii. Rationalization
1. Studies show that more creative people tend to be less ethical because they
are better at rationalizing their bad behavior
iv. We Cannot Be Objective about Ourselves
1. People are not objective when comparing themselves to others
2. We evaluate other people’s behavior more harshly
3. In making a decision that affects you, it is important to remember that you
are unlikely to be objective
v. Moral Licensing
1. After doing something ethical, many people then have a tendency to act
unethically
vi. Conflicts of Interest
1. If ethical decisions are your goal, it is better to avoid all conflicts of interest
– both large and small
vii. Conformity
1. Many people believe that if everybody else is doing it, then it must be okay.
viii. Following Orders
1. Employees who work for firms with a culture of blind obedience are twice
as likely to report having seen unethical behavior as are workers at
companies with a more collaborative environment
ix. Short-term perspective
1. Many times, people make unethical decisions because they are thinking
short term
2. Optimism bias: a belief that the outcome of an event will be more positive
than the evidence warrants
x. Blind spots
1. We all have a tendency to ignore blatant evidence that we would rather not
know
xi. Avoiding Ethics Traps
 1. Slow down
2. Do not trust your first instinct
3. Remember your life principles
d. Reacting to Unethical Behavior
i. When faced with unethical behavior in your organization, you have three choices:
1. Remain loyal
2. Leave the company
3. Voice your opinion
e. Corporate Social Responsibility
i. CSR: an obligation to contribute positively to the world around you
3. Dispute Resolution
a. Introduction
i. Litigator: Lawyer who handles court cases
ii. Litigation: Lawsuits, the process of filing claims in court, and ultimately going to trial
iii. Alternative Dispute Resolution (ADA): Any other formal or informal process used to
settle disputes without resorting to a trial
b. Court Systems
i. The US has more than 50 systems of courts
ii. State Courts
1. Trial Courts
a. Determine the facts of a particular dispute and apply to those facts
the law given by earlier appellate court decisions
b. Jurisdiction refers to a courts power to hear a case
2. Subject Matter Jurisdiction
a. Means that a court has the authority to hear a particular type of
case
3. Personal Jurisdiction
a. Courts must have personal jurisdiction over the defendant in
addition to subject matter jurisdiction
b. Personal jurisdiction: the legal authority to require the defendant to
stand trial, pay judgements, and the like
c. Defendants sometimes make a special appearance to challenge a
court’s personal jurisdiction to get the suit dismissed
d. Personal Jurisdiction generally exists if:
i. For individuals, the defendant is a resident of the state in
which a lawsuit is filed. For companies, the defendant is
doing business in that state
ii. The defendant takes a formal step to defend a lawsuit. Most
papers filed with a court count as formal steps, but special
appearances do not.
iii. A summons is served on a defendant. The summons must
be delivered to the defendant while in the state that the
suit is filed
iv. Long-arm statute: a statute that gives a court jurisdiction
over someone who commits a tort, signs a contract, or
conducts “regular business activities” in the state
e. It is unfair to require a defendant to stand trial in another state if he
has had no meaningful interaction with that state
 4. State Appellate Courts
a. Three or more judges hear the case and there are never any juries
b. Appeals courts generally accepts the facts given to them by trial
courts and review the trial record to see if the court made errors of
law
c. An appeals court reviews the trial record to make sure that the
lower court correctly applied the law to the facts. If the trial court
made an error of law, the appeals court may require a new trial
d. Court of Appeals
i. The party filing the appeal is the appellant
ii. The party opposing the appeal is the appellee
5. State Supreme Court
a. In most states, seven judges, often called justices, sit on the state
Supreme Court. They have the final word on state law.
iii. Federal Courts
1. Federal Question Cases
a. A claim based on the US Constitution, a federal statute, or a federal
treaty is called a federal question case
2. Diversity Cases
a. Even if no federal law is at issue, federal courts have diversity
jurisdiction when;
i. The plaintiff and defendant are citizens of different states
and
ii. The amount in dispute exceeds $75,000
3. Federal Trial Courts
a. United States District Court
i. This is the primary trial court in the federal system. The
nation is divided into about 94 districts, and each has a
district court
4. Federal Appellate Courts
a. United States Supreme Court
i. This is the highest court in the country.
ii. There are nine justices on the court consisting of the chief
justice and the other eight are associate justices
iii. A party that wants the Supreme Court to review a lower
court ruling must file a petition for a writ of certiorari,
asking the court to hear the case. Four of the nine justices
must vote in favor of hearing a case before a writ will be
granted.
iv. Writ of certiorari: a petition asking the Supreme Court to
hear a case
c. Before Trial
i. Pleadings
1. The documents that begin a lawsuit are called the pleadings. These consist
of the complaint, the answer, and sometimes a reply
2. Complaint
 a. The plaintiff files in court a complaint, which is a short, plain
statement of the facts she is alleging and the legal claims she is
making
3. Answer
a. When a complaint is filed, the defendant gets a summons ordering
the defendant to answer the complaint within 20 days.
b. If the defendant fails to answer in time, the plaintiff will ask for a
default judgement. In granting a default judgement, the judge
accepts every allegation in the complaint as true and renders a
decision that the plaintiff wins without a trial
4. Counterclaim
a. Sometimes a defendant does more than merely answer a complaint
and files a counterclaim, meaning a second lawsuit by the
defendant against the plaintiff
5. Class Actions
a. A class action represents an entire group of plaintiffs, including
those who are unaware of the lawsuit or even unaware they were
harmed
6. Judgement on the Pleadings
a. A party can ask the court for a judgement based simply on the
pleadings themselves, by filing a motion to dismiss.
b. A motion is a formal request to the court that it take some step or
issue some order.
c. A motion to dismiss is a request that the court terminate a case
without permitting it to go further.
ii. Discovery
1. Interrogatories
a. These are written questions that the opposing party must answer,
in writing, under oath
2. Depositions
a. These provide a chance for one party’s lawyer to question the other
party, or a potential witness, under oath.
b. The person being questioned is the deponent.
3. Production of Documents and Materials
4. Physical and Mental Examination
a. Motion for a protective order: a request that the court limit the
opponent’s discovery by decreasing the number of depositions
b. The parties are entitled to discover anything that could reasonable
lead to valid evidence
c. Motion to compel answers to interrogatories: a request to supply
more complete answers
d. A judge can reach a discovery by an in camera inspection meaning
that the judge views the requested documents alone and decides
whether the other side is entitled to view them
5. E-Discovery
iii. Summary Judgement
1. A summary judgement is a ruling by the court that no trial is necessary on a
particular issue because the essential facts are not in dispute
d. Anatomy of a Trial and Appeal
i. The Trial
1. Voir Fire
a. Voir Dire: The process of selecting a jury; means “to speak the
truth”
b. Challenges for cause claims that a juror has demonstrated probable
bias
c. Peremptory challenges entitle you to excuse that juror for virtually
any reason, which need not be stated in court. You make a limited
number of these.
d. The jury selection process continues until 14 are seated. 12
comprise the jury; the other two are alternatives who hear the case
and remain available in the event one of the impaneled jurors
becomes ill or otherwise cannot continue
2. Burden of Proof
a. The plaintiff has to prove its case by a preponderance of evidence.
i. It must convince the jury that its version of the facts is at
least slightly more likely than the defendant’s version.
b. In a criminal case, the prosecution must demonstrate beyond a
reasonable doubt that the defendant is guilty
3. Plaintiff’s case
a. When a lawyer asks questions of their own witness, it is direct
examination
b. Cross-examination: asking questions to an opposing witness
4. Motion for Directed Verdict
a. A directed verdict is a ruling that the plaintiff has entirely failed to
prove some aspect of their case
b. A directed verdict is permissible only if the evidence so clearly
favors the defendant that reasonable minds could not disagree on
it.
5. Motions after the verdict:
a. Judgement non-obstante veredicto (JNOV): a judgement
notwithstanding the jury’s verdict
ii. Appeals
1. Appeals Court Options
a. The court can affirm the trial court, allowing the decision to stand
b. Court can modify the decision, such as changing the award amount
c. Reverse and remand, nullifying the lower court’s decision and
return the case to the lower court for a new trial
d. Reverse, turning the loser into the winner with no new trial
e. Harmless error: a mistake by the trial judge that was too minor to
affect the outcome
e. Alternative Dispute Resolution ADR
i. Negotiation
ii. Mediation
1. Fastest growing method of dispute resolution in the United States
2. Good mediators don’t need a law degree
3. Advantages
 a. The two people can speak freely
b. Don’t need to fear conceding too much because no settlement
takes effect until both parties sign
c. All discussions are confidential, further encouraging candid talk
d. Helpful in cases involving proprietary information that would
otherwise be revealed during a trial
iii. Arbitration
1. Mandatory arbitration validity from signed contracts
a. Courts enforce arbitration clauses if they meet two conditions
i. Both parties must mutually promise to submit disputes to
arbitration. A unilateral arbitration agreement only
requiring one party to give up its right to sue is
unenforceable
ii. The clause must provide a neutral forum to resolve disputes
and adopt sufficient rules to govern a proceeding. One party
cannot retain exclusive control over the appointment of
arbitrators.
4. Common Law, Statutory Law, and Administrative Law
a. Common Law
i. The common law is judge-made law. It is the sum total of all the cases decided by
appellate courts.
ii. Stare Decisis
1. Courts do not always follow precedent, but they generally do
2. The more flexibility we permit, the less predictability we enjoy
iii. Bystander Cases
1. The US inherited from England a simple rule about bystander’s obligations:
you have no duty to assist someone in peril unless you created the danger
2. Common law changes slowly
b. Statutory Law
i. More law is created by statute than by the courts
ii. Legislators pass state statues
iii. Senators and representatives create federal statutes
iv. Congressional members in DC create statutes
v. Bills
1. Congress is organized into two houses: the house of representatives and the
senate
2. Either house may originate a proposed statue, called a bill
3. To become law, the bill must be voted on and approved by both houses
4. Once both houses pass it, it is sent to the president for the final OK
5. When a bill is proposed, it is referred to the committee that specializes in
that subject.
6. Bills are proposed for:
a. New issue, new worry
i. If society begins to focus on a new issue, congress may
respond with legislation
b. Unpopular judicial ruling
 i. If congress disagrees with a judicial interpretation of a
statute, the legislators may pass a new statue to modify or
undo the court decision
c. Criminal law
i. Almost all criminal law is statutory
vi. Statutory Interpretation
1. Three primary steps in a court’s statutory interpretation
a. Plain meaning rule
i. The word “religion” has a plain meaning and courts apply its
commonsense definition
b. Legislative history and intent
c. Public Policy
i. If the legislative history is unclear, courts will rely on general
public policies, such as reducing crime and creating equal
opportunity
vii. Congressional Override
1. When the president vetoes a bill, Congress has one last chance to make it
law: and override.
2. If both houses repass the bill, each by 2/3 margin, it becomes law over the
president’s veto
c. Administrative Law
i. Creation of Agencies
1. Courts decide individual cases; they do not regulate industries. Congress
itself passes statutes, but it has no personnel to oversee the day-to-day
working of a huge industry.
2. Congress creates administrative agencies
3. Classification of Agencies
a. Types of Agencies: Executive and Independent
i. Executive
1. Part of the executive branch, the president holds a
great amount of control over these agencies
2. Examples include: IRS, FBI, and the FDA
ii. Independent
1. President has no removal power over independent
agencies
2. Examples include FTC, SEC, and the EPA
b. Enabling Legislation
i. Congress creates a federal agency by passing enabling
legislation
ii. Power of Agencies
1. Rulemaking
a. Types of Rules: Legislative and Interpretive
i. Legislative rules are the most important agency rules, and
they are much like statutes
ii. Interpretive rules do not change the law. They are the
agency’s interpretation of what the law already requires
b. How Rules are Made
i. Informal Rulemaking
 ii. Formal Rulemaking
1. Congress may require that an agency hold a hearing
before promulgating rules
2. When used responsibly, these hearings give the
public access to the agency and can help formulate
sound policy
3. When used irresponsibly, hearings can be
manipulated to stymie needed regulation
2. Investigation
a. Subpoenas: orders to appear at a particular time and place to
provide evidence.
i. A subpoena duces tecum requires the person to appear and
bring specified documents
ii. The information sought
1. Must be relevant to a lawful agency investigation
2. Must not be unreasonably burdensome
3. Must not be privileged
b. Search and Seizure
3. Adjudication
a. To adjudicate a case is to hold a hearing about an issue and then
decide it
b. Most adjudications begin with a hearing before an administrative
law judge (ALJ)
i. There is no jury
ii. An ALJ is an employee of the agency but is expected to be
impartial in their rulings
iii. All parties are represented by counsel
iv. The rules of evidence are informal, and an ALJ may receive
any testimony or documents that will help resolve the
dispute
iii. Limits on Agency Power
1. Statutory Control
2. Political Control
a. Congress holds the purse to agencies and can cut funding
3. Judicial Review
4. Informational Control and the Public
a. Freedom of Information Act (FOIA)
i. Any citizen may make a FOIA request to any federal
government agency. It is a simple written request that the
agency furnish whatever information it has on the subject
specified
ii. Anyone is entitled to information about how the agency
operates, how it spends its money, and what statistics and
other information it has collected on a given subject
iii. Second, all citizens are entitled to any records the
government has about them.
1. You are entitled to information that the IRS or the
FBI has collected about you.
5. Constitutional Law
a. Who Will Have Power?
i. Creating the Constitution
1. Federalists support a strong central government
2. Antifederalists don’t support a strong central government
3. The Constitution is a series of compromises about power
4. Separation of Powers
a. Article 1 of the Constitution created congress and gave them
legislative power
b. Article 2 created the office of president, defining the scope of
executive power
i. The president could appoint federal judges and members of
his cabinet, but only with consenting vote from the Senate
ii. Three key powers of the president
1. Appointment
2. Legislation
3. Foreign Policy
a. Article 2 does not give the president the
right to declare war – only the Senate can
c. Article 3 established judicial power by creating the supreme court
and permitting additional federal courts
i. Two key functions
1. Adjudication
2. Judicial Review
a. Judicial review refers to the power of the
federal courts to declare a statute or
governmental actional unconstitutional and
void
5. Individual Rights
a. The original Constitution was silent about the rights of citizens
b. In 1791, the first ten amendments, the Bill of Rights, were added to
the constitution, guaranteeing many liberties directly to individual
citizens
ii. Congressional Power
1. Article 1, section 8 lists the 18 types of statues that Congress is allowed to
pass, such as imposing taxes, declaring war, and coining money
2. Interstate Commerce
a. Article I, section 8: Congress may regulate any activity that has a
substantial economic effect on interstate commerce
3. State Legislative Power
a. The dormant aspect of the Commerce Clause holds that a state
statute discriminating against interstate commerce is almost always
unconstitutional
4. Supremacy Clause
a. The Supremacy Clause states that the Constitution, and federal
statutes and treaties, shall be the supreme law of the land
iii. Judicial Activism / Judicial Restraint
 1. The Constitution means whatever the majority of the current justices says it
means, because the Court tells us what laws are violative. Therefore, they
could strike down and law it dislikes.
2. Judicial activism refers to the court’s willingness to become involved in
major issues and to decide cases on constitutional grounds
3. Judicial restraint is the attitude that courts should leave the lawmaking to
legislators and nullify a law only when it unquestionably violates the
Constitution
b. Protected Rights
i. Both people and corporations have protected rights, since corporations are looked
at as an entity.
ii. Constitutional rights generally protect only against governmental acts
1. Incorporation
a. A series of Supreme Court cases has extended virtually all of the
important constitutional protections to all levels of national, state,
and local government.
b. This process is called incorporation because rights explicitly
guaranteed at one level are incorporated into rights that apply at
other levels
iii. First Amendment
1. Political Speech
a. Political speech is protected unless it is intended and likely to create
imminent lawless action
2. Time, Place, and Manner
a. Even when speech is protected, the government may regulate the
time, place, and manner of such speech
3. Morality and Obscenity
a. Obscenity has never received constitutional protection
b. Supreme Court has created a three-part test to determine if a
creative work is obscene
i. Whether the average person, applying contemporary
community standards, would find that the work, taken as a
whole, appeals to the prurient interest
ii. Whether the work depicts or describes, in a patently
offensive way, sexual conduct specifically defined by the
applicable state law; and
iii. Whether the work, taken as a whole, lacks serious literacy,
artistic, political, or scientific value
c. The court must find that all three of the tests to be true for the
material to be obscene, then it may prohibit the work
4. Commercial Speech
a. Speech does not lose its first amendment protection because
someone paid for it
b. Commercial speech is that which proposes a commercial
transaction, such as advertisements
c. Commercial speech that concerns an illegal activity or misleads
consumers may be outlawed altogether
 d. When commercial speech is not illegal or misleading, the
government may regulate if:
i. It has a substantial interest in regulating the speech
ii. The speech restriction directly advances this interest; and
iii. The regulation restricts no more speech than necessary
e. In other words, the government may regulate commercial speech
provided that the rules are reasonable and directly advance a
legitimate government goal
iv. Fifth Amendment – Due Process
1. Three Important Limitations
a. Procedural Due Process
i. Before depriving anyone of liberty or property, the
government must go through certain procedures to ensure
that the result is fair
ii. The purpose is to ensure that before the government takes
liberty or property, the affected person has a fair chance to
oppose the action.
iii. Two Steps in Analyzing a Procedural Due Process Case
1. Is the government attempting to take liberty or
property?
2. If so, how much process is due?
a. What sort of hearing the government must
offer depends upon how important the
property or liberty interest is and on
whether the government has a competing
need for efficiency
b. The Takings Clause
i. When the government takes property for public use, such
as to build a new highway, it has to pay a fair price
ii. The Takings Clause prohibits a state from taking private
property for public use without compensation
iii. Before a government may require an owner to dedicate
land to public use, it must show that this owners’ proposed
building requires this dedication of land
c. Substantive Due Process
i. Some rights are so fundamental that the government may
not take them from us at all. The substance of any law or
government action may be challenged on fundamental
fairness grounds
ii. The Supreme Court has struck down dozens of state and
federal laws by substantive due process because the court
was looking at the underlying rights being affected, such as
the right to contact, not at any procedures
v. Fourteenth Amendment: Equal Protection Clause
1. Damages
a. When plaintiffs win cases, juries may award two types of damages
i. Ordinary Damages
 1. Damages to offset real, measurable losses from the
case
ii. Punitive Damages
1. Damages to further punish a defendant for bad
behavior
2. Punitive damages may be appealed if they are
beyond what is reasonable for the case.
2. Equal Protection Clause
a. Governments must treat people equally
b. Three major groups of constitutional permissible groups
i. Minimal Scrutiny: Economic and Social Relations
1. Government actions that classify people or
corporations on these bases are almost always
upheld
ii. Intermediate Scrutiny: Gender
1. Government classifications are sometimes held
iii. Strict Scrutiny: Race, Ethnicity, and Fundamental Rights
1. Classifications are almost never upheld
2. Any government action that intentionally
discriminates against racial or ethnic minorities, or
interferes with a fundamental right, is presumed
invalid
6. Torts and Product Liability
a. Introduction
i. A tort is a violation of a duty imposed by the civil law. When a person breaks one of
these duties and injures another, it is a tort
b. Intentional Torts
i. Defamation
1. The law of defamation concerns false statements that harm someone’s
reputation
2. Written defamation is called libel, and oral defamation is slander
3. Elements in a Defamation Case
a. Defamatory Statement
i. The statement must be a factual statement therefore
opinions do not make a factual statement
ii. Falsity – the statement must be false
iii. Communicated – The statement must be communicated to
at least one person other than the plaintiff
iv. Injury – the plaintiff must show some injury, unless the case
involves false statements about sexual behavior, crimes,
contagious diseases, and professional abilities. In this case,
the law is willing to assume injury without requiring the
plaintiff to prove it. Lies in these categories are slander per
se or libel per se
4. Public Personalities
a. A public official or public figure can win a defamation case only by
proving actual malice by the defendant.
 b. Actual malice means that the defendant knew the statement was
false or acted with reckless disregard of the truth
c. The New York Times rule has been extended to all public figures,
like actors, business leaders, and anyone else who assumes an
influential and visible role in society
5. Privilege
a. Defendants receive additional protection from defamation cases
when it is important for them to speak freely
b. Absolute privilege exists in courtrooms and legislative hearings.
c. Anyone speaking with absolute privilege can say anything and never
be sued for defamation
ii. False Imprisonment
1. False imprisonment is the intentional restraint of another person without
reasonable cause and without consent
2. Generally, a store may detain a customer or worker for alleged shoplifting
provided there is a reasonable basis for the suspicion and the detention is
done reasonably
iii. Intentional Infliction of Emotional Distress
1. IIED results from extreme and outrageous conduct that causes serious
emotional harm
2. Courts have held that tasteless, rude, inappropriate, or vulgar conduct alone
is not enough to establish an IIED claim, even if it really upset someone
iv. Additional Intentional Torts
1. Battery – an intentional touching of another person in a way that is
unwanted or offensive. There need be no intention to hurt the plaintiff
2. Assault – when a defendant does some act that makes a plaintiff fear an
imminent battery. It is assault even though the battery never occurs
3. Fraud – Injuring another person by deliberate deception
c. Damages
i. Compensatory Damages
1. A successful plaintiff generally receives compensatory damages, meaning an
amount of money that the court believes will restore them to the position
they were in before the defendant’s conduct caused injury
2. How damages are calculated:
a. A plaintiff receives money for medical expense
i. If a doctor testifies that you will need future treatment,
they will offer evidence of how much that will cost
ii. The single recovery principle requires a court to settle the
matter once and for all by awarding a lump sum for past
and future expenses, if there will be any
b. Second, the defendants are liable for lost wages
c. Third, a plaintiff is paid for pain and suffering
i. Awards for future harm involve the court makings its best
estimate of the plaintiff’s hardship in the years to come
d. Business Torts
i. Tortious Interference with a Contract
1. Four Elements
a. There was a contract between the plaintiff and a third party
 b. The defendant knew of the contract
c. The defendant improperly induced the third party to breach the
contract or made performance of the contract impossible; and
d. There was injury to the plaintiff
2. A defendant may also rely on the defense on justification; that is, a claim
that special circumstances made its conduct fair
a. It was acting to protect an existing economic interest, such as its
own contract with the third parts
b. It was acting in the public interest
c. The existing contact could be terminated at will by either party,
meaning that although the plaintiff had a contract, the plaintiff had
no long-term assurances because the other side could end it at any
time
ii. Tortious Interference with a Prospective Advantage
1. A plaintiff who has a definite and reasonable expectation of obtaining an
economic advantage may sue a corporation that maliciously interferes and
prevents the relationship from developing
e. Negligence
i. To win a negligence case, a plaintiff must prove five elements
1. Duty of due care
a. The defendant had a legal responsibility to the plaintiff
b. Each of us has a duty to behave as a reasonable person would under
the circumstances
c. If the defendant could have foreseen injury to a particular person,
she has a duty to him
d. Landowners:
i. Low Liability: Trespassing Adults
1. A landowner is liable to a trespasser only for
intentionally injuring him or for some other gross
misconduct. The landowner has no liability to a
trespasser for mere negligence
ii. Mid-Level Liability: Trespassing Children
1. If there is some human-made thing on the land that
may be reasonably expected to attract children, the
landowner is probably liable for any harm
iii. Higher Liability: Licensee
1. A licensee is anyone on the land for her own
purposes but with the owner’s permission
2. A licensee is entitled to a warning of hidden dangers
that the owner knows about
iv. Highest Liability: Invitee
1. AN invitee is someone who has the right to be on
the property because it is a public space or a
business open to the public. The owner has a duty
of reasonable care to an invitee
2. With social guests, you must have actual knowledge
of some specific hidden danger to be liable, unlike
 invitees. You are liable even if you had no idea that
something on your property posed a hidden danger.
v. Professionals
1. While on the job, you must act as a reasonable
person in your profession
2. Breach
a. The defendant breached her duty of care or failed to meet her legal
obligations
b. Negligence Per Se
i. When a legislature sets a minimum standard of care for a
particular activity, in order to protect a certain group of
people, and a violation of the statute injures a member of
that group, the defendant has committed negligence per se
ii. A plaintiff who can show negligence per se doesn’t need to
prove breach of duty
3. Factual Cause
a. The defendant’s conduct actually caused the injury
b. If the defendant’s breach led to the ultimate harm, it is the factual
cause
4. Proximate Cause
a. It was foreseeable that conduct like the defendants might cause this
type of harm
b. For the defendant to be liable, the type of harm must have been
reasonable foreseeable
c. Res Ipsa Loquitur
i. A court may be willing to infer that the defendant caused
the harm under the doctrine of Res Ipsa Loquitur
ii. Many courts will apply this and declare that the facts imply
that the defendants negligence caused the accident
iii. Dramatically shifts the burden of proof from plaintiff to
defendant, and only applies when
1. The defendant had exclusive control of the thing
that caused the harm
2. The harm normally would not have occurred
without negligence, and
3. The plaintiff had no role in causing the harm
5. Damages
a. The plaintiff has actually been hurt or has actually suffered a
measurable loss
b. The plaintiff must persuade the court that he has suffered harm
that is genuine, not speculative
f. Defenses
i. Contributory Negligence
1. If the plaintiff is even slightly negligent, they recover nothing
2. Most states have thrown out this rule
ii. Comparative Negligence
1. A plaintiff may generally recover even if they are partially responsible
iii. Assumption of Risk
 1. A person who voluntarily enters a situation that has an obvious danger
cannot complain if they are injured
g. Strict Liability and Product Liability
i. Strict Liability – High Burden
1. Ultrahazardous Activity
a. A defendant engaging in an ultrahazardous activity is almost always
liable for any harm that results
b. The reasonable person rule is irrelevant in a strict liability case
2. Defective Products
ii. Product Liability
1. Negligence
a. In negligence cases concerning goods, plaintiffs typically raise one
or more of these claims:
i. Negligent Design
1. The buyer claims that the product injured her
because the manufacturer designed it poorly
ii. Negligent Manufacture
1. The buyer claims that the design was adequate but
that failure to inspect or some other carless conduct
caused a dangerous product to leave the plant
iii. Failure to Warn
1. A manufacturer is liable for failing to warn the
purchaser or users about the dangers of normal use
and also foreseeable misuse
2. Strict Liability for Defective Products
a. To win a strict liability case, the injured person must show only that
the defendant manufactured or sold a product that was defective
and that the defect caused harm
b. Model
i. One who sells any product in a defective condition
unreasonably dangerous to the user or consumer or to his
property is subject to liability for physical harm thereby
caused to the ultimate user or consumer, or to his property,
if:
1. The seller is engaged in the business of selling such
a product and
2. It is expected to and does reach the user or
consumer without substantial change in the
condition in which it is sold.
ii. The rule stated in Part (1) applies although:
1. The seller has exercised all possible care in the
preparation and sale of his product and
2. The user or consumer has not bought the product
from or entered into any contractual relation with
the seller
c. Risk-Utility Test
i. When a court must weigh the benefits for society against
dangers that the product poses
 ii. Principle Factors
1. The value of the product
2. The gravity, or seriousness, of the danger
3. The likelihood that such danger will occur
4. The mechanical feasibility of a safer alternative
design; and
5. The adverse consequences of an alternative design
7.
8. Crime
a. Criminal Procedure
i. Civil vs. Criminal Case
1. Conduct is criminal when society outlaws it
2. Prosecution
a. The local prosecutor has total discretion in deciding whether to
bring you to trial on criminal charges
3. Burden of Proof
a. Because the penalties for conviction in a criminal case are much
more serious than that of a civil case, the government must prove
its case beyond a reasonable doubt
4. Right to a Jury
a. A criminal defendant has a right to a trial by jury for any charge that
could result in a sentence of six months or longer
b. When the judge is the fact finder, the proceeding is called a bench
trial
5. Felonies and Misdemeanors
a. A felony is a serious crime, for which a defendant can be sentenced
to one year or more in prison
b. A misdemeanor is a less serious crime, often punishable by a year or
less in county jail
c. Courts can order restitution, meaning that the defendant
reimburses the victim for harm suffered
ii. Conduct Outlawed
1. The 5th and 14th amendments require that the language of criminal statues
be clear and definite enough that
a. Ordinary people can understand what conduct is prohibited and
b. Enforcement cannot be arbitrary and discriminatory
iii. State of Mind
1. Voluntary Act
a. A defendant is not guilty of a crime if she was forced to commit it or
acted under duress.
b. The defendant bears the burden of proving by a preponderance of
the evidence that she did act under duress
2. Entrapment
a. When the government induced the defendant to break the law, the
prosecution must prove beyond a reasonable doubt that the
defendant was predisposed to commit the crime
3. Conspiracy
 a. It is illegal to conspire to commit a crime, even if that crime never
actually occurs. A defendant can be convicted of taking part in a
conspiracy if;
i. A conspiracy existed
ii. The defendants knew about it, and
iii. Some member of the conspiracy voluntarily took a step
toward implementing it
iv. Gathering Evidence: The 4th amendment
1. The 4th amendment prohibits the government from making illegal searches
and seizures.
2. The 4th amendment applies to individuals, corporations, partnerships, and
other organizations
3. Warrant
a. A warrant is written permission from a neutral official, such as a
judge or magistrate, to conduct a search.
b. The magistrate will issue a warrant only if there is probable cause,
or it is likely that evidence of a crime will be found in the place to be
searched
c. If the police search without a warrant, they have violated the 4th
amendment in most cases
d. A search conduced with a warrant violates the 4th amendment if
i. There was no probable cause to issue the warrant
ii. The warrant does not specify with reasonable precision that
place to be searched and the things sought; or
iii. The search extends beyond what is specified in the warrant
4. Searches without a warrant
a. Circumstances where a warrant is not needed
i. Plain View
ii. Stop and Frisk
1. The police do have the right to stop and frisk, but
only if they have a clear and specific reason to
suspect that criminal activity may be afoot and that
the person may be armed and dangerous
iii. Emergencies
1. If the police believe that evidence is about to be
destroyed, they can search without a warrant
iv. Automobiles
1. If police have lawfully stopped a car and then
observe evidence of other crimes in the car, they
may search
v. Lawful Arrest
1. Police may always search a suspect they have
arrested. The goal is to protect the officers and
preserve evidence
vi. Consent
1. Anyone lawfully living in a dwelling can allow the
police to search it without a warrant
vii. No Expectation of Privacy
 1. The police have a right to search any area in which
the defendant does not have a reasonable
expectation of privacy
viii. Technology and social media have challenged courts to
define reasonable expectations of privacy in new settings
1. DNA tests
2. Blood vs breath tests
3. Heat-seeking devices
4. Digital cameras
5. Cell phones
6. Computers
7. GPS
8. Email
9. Websites
10. Internet Messages
11. Social Media
5. Exclusionary Rule
a. Under the exclusionary rule, any evidence the government acquires
illegally may not be used at trail
b. Three Exceptions to the Exclusionary Rule
i. Inevitable Discovery
1. Any time that evidence would have been found
even without the illegal behavior of police
ii. Independent Source
1. If the police find the tainted evidence from a
different source, they can use it
iii. Good Faith Exception
1. Police use a search warrant believing it to be
proper, but later it proves defective. The search is
legal as long as the police reasonably believed the
warrant was valid
v. After Arrest
1. The 5th Amendment
a. Due Process
i. Due process required fundamental fairness at all stages of
the case
ii. The prosecution is required to disclose evidence favorable
to the defendant
b. Self-Incrimination
i. The 5th amendment bars the government from forcing any
person to provide evidence against himself
2. Right to a Lawyer
a. The 6th amendment guarantees the right to a lawyer at all important
stages of the criminal process
b. Because of this right, the government must appoint a lawyer to
represent, free of charge, any defendant who cannot afford one
3. Indictment
 a. The grand jury is a group of ordinary citizens, like a trial jury, but the
grand jury holds hearings for several weeks at a time, on many
different cases.
b. If the grand jury determines that there is probably cause that the
defendant committed the crime with which she is charged, an
indictment is issued
c. An indictment is the government’s formal charge that the
defendant has committed a crime and must stand trial
4. Plea Bargaining
a. Plea bargaining is an agreement between prosecution and defense
that the defendant will plead guilty to a reduced charge, and the
prosecution will recommend to the judge a relatively lenient
sentence.
b. 97% of prosecutions in the federal court system end in a plea
bargain
5. Punishment
a. The 8th amendment prohibits cruel and unusual punishment and
excessive fines
b. Forfeiture is a civil law proceeding that is permitted by many
different criminal statues
c. To determine if forfeiture is fair, courts generally look at three
factors
i. Whether the property was used in committing the crime
ii. Whether it was purchased with proceeds from illegal acts,
and
iii. Whether the punishment is disproportionate to the
defendant’s wrongdoing
d. The Supreme Court ruled that the government could not freeze the
assets of an accused criminal, if that action would interfere with the
defendant’s ability to hire a lawyer
b. Crimes that Harm Businesses
i. Larceny
1. Larceny is the trespassory taking of personal property with intent to steal it
2. Trespassory taking means that someone else originally has the property
ii. Embezzlement
1. The fraudulent conversion of property already in the defendant’s possession
iii. Fraud
1. Fraud refers to various crimes with a common element: The deception of
another person for the purpose of obtaining money or property from him
2. Wire Fraud and Mail Fraud
a. Wire fraud and mail fraud are additional federal crimes, involving
the use of interstate mail, telegram, telephone, radio, or television
to obtain property by deceit
3. Auctions
a. Shilling means that a seller either bids on his own goods or agrees to
cross-bid with a group of other sellers
4. Identity Theft
 a. The Identity Theft and Assumption Deterrence Act of 1998 prohibits
the use of false identification to commit fraud or other crime and it
also permits the victim to seek restitution in court
5. Phishing
a. A crime where a fraudster sends a message directing the recipient
to enter personal information on a website that is an illegal
imitation of a legitimate site
b. Spear phishing involves personalized messages sent from someone
the victim knows
iv. Arson
1. The malicious use of fire or explosives to damage or destroy any real estate
or personal property
v. Hacking
1. Hacking is a crime under the federal Computer Fraud and Abuse Act of 1986
(CFAA)
2. The CFAA prohibits
a. Accessing a computer without authorization and obtaining
information from it,
b. Computer espionage
c. Theft of financial information
d. Theft of information from the US government
e. Theft from a computer
f. Computer Fraud
g. Intentional, reckless, and negligent damage to a computer
h. Trafficking in computer passwords, and
i. Computer extortion
c. Crimes Committed by Business
i. A corporation can be found guilty of a crime based on the conduct of any of its
agent, who include anyone undertaking work on behalf of the corporation
ii. If an agent commits a criminal act within the scope of his employment and with the
intent to benefit the corporation, the company is liable
iii. Making False Statements
1. It is illegal to make false statements or engage in a cover-up during any
dealings with the United States government
iv. RICO – The Racketeer Influenced and Corrupt Organizations Act (RICO)
1. RICO prohibits using two or more racketeering acts to accomplish any of
these goals
a. Investigating in or acquiring legitimate businesses with criminal
money
b. Maintaining or acquiring businesses through criminal activity, or
c. Operating businesses through criminal activity
2. Proving a person or organization has violated RICO
a. The prosecutor must show that the defendant committed two or
more racketeering acts: embezzlement, arson, mail fraud, wire
fraud, and so forth
b. The prosecutor must then show that the defendant used these acts
to accomplish one of the three purposes prohibited by RICO
 3. RICO is powerful because a civil plaintiff can recover treble damages – a
judgement for three times the harm actually suffered, as well as attorney’s
fees
v. Money Laundering
1. Consists of taking the proceeds of certain criminal acts and either
a. Using the money to promote crime or
b. Attempting to conceal the source of the money
vi. Foreign Corrupt Practices Act
1. The Foreign Corrupt Practices Act (FCPA) prohibits American companies
from paying bribes overseas
2. The FCPA has two principal requirements
a. Bribes
i. The statute makes it illegal for any employee or agent of a
US company or and US citizen to bribe foreign officials to
influence a governmental action
ii. A promise to pay bribes violates the FCPA
b. Recordkeeping
i. All publicly traded companies must keep accurate and
detailed records to prevent hiding or disguising bribes
3. A grease or facilitating payment for a routine governmental action is
permitted
4. To be legal, the facilitating payments must be hastening an inevitable result
that does not involve discretionary action
vii. Punishing a Corporation
1. Compliance Programs
a. The federal sentencing guidelines are the detailed rules that judges
must follow when sentencing defendants convicted of crimes in
federal court
b. The guidelines instruct judges to determine whether, at the time of
the crime, the corporation had in place a serious compliance
program; that is, a plan to prevent and detect criminal conduct at all
levels of the company
9.
10. Introduction to Contracts
a. Introduction
i. Elements of a Contract
1. For a contract to be enforceable, seven key characteristics must be present
a. Offer
i. Only proposals made in certain ways amount to a legally
recognized offer
b. Acceptance
i. Once a party receives an offer, he must respond to it in a
certain way
c. Consideration
i. There has to be bargaining that leads to an exchange
between the parties. Contracts cannot be a one-way street;
both sides must receive some measurable benefit
d. Legality
 i. The contract must be for a lawful purpose
e. Capacity
i. The parties must be adults of sound mind
f. Consent
i. Certain kinds of trickery and force can prevent the
formation of a contract
g. Writing
i. Some types of contracts must be in writing to be
enforceable
ii. Types of Contracts
1. Bilateral and Unilateral Contracts
a. In a bilateral contract, both parties make a promise
b. In a unilateral contract, one party makes a promise that the other
party can accept only by actually doing something
2. Executory and Executed Contracts
a. A contract is executory when it has been made, but one or more
parties have not yet fulfilled their obligations
b. A contract is executed when all parties have fulfilled their
obligations
3. Valid, Unenforceable, Voidable, and Void Agreements
a. A voidable contract occurs when the law permits one party to
terminate the agreement
b. A void agreement is one that neither party can enforce, usually
because the purpose of the deal is illegal or because one of the
parties had no legal authority to make a contract
4. Express and Implied Contracts
a. In an express contract, the two parties explicitly state all the
important terms of their agreement
b. Many oral contracts are fully enforceable
c. In an implied contract, the words and conduct of the parties
indicate that they intended an agreement
iii. Sources of Contract Law
1. Uniform Commercial Code (UCC) 1952
a. The most important part of the code is article 2, which governs the
sale of goods
b. Goods means anything movable, except for money, securities, and
certain legal rights
iv. Enforcing Non-Contractual Bargains
1. Promissory Estoppel
a. The defendant made a promise that the plaintiff relied on
b. A plaintiff may use promissory estoppel to enforce the defendants
promise if he can show that:
i. The defendant made a promise knowing that the plaintiff
would likely rely on it
ii. The plaintiff did rely on the promise, and
iii. The only way to avoid injustice is to enforce the promise
2. Quasi-Contract
 a. The defendant received a benefit from the plaintiff and retaining
that benefit would be unfair
b. A court may use quasi-contract to compensate a plaintiff who can
show that
i. The plaintiff gave some benefit to the defendant
ii. The plaintiff reasonably expected to be paid for the benefit
and the defendant knew this, and
iii. The defendant would be unjustly enriched if he did not pay
c. If a court finds all of these elements resent, it will generally award
the value of the goods or services that the plaintiff has conferred
d. The damages awarded are called quantum meruit, meaning that the
plaintiff gets as much as they deserve
b. The Agreement
i. Meeting of the Minds
1. Parties form a contract only if they have a meeting of the minds
2. One side must make an offer and the other must make an acceptance
3. An offer proposes definite terms, and an acceptance unconditionally agrees
to them
ii. Offer
1. Two questions determine whether a statement is an offer
a. Do the offeror’s words and actions indicate an intention to make a
bargain?
b. Are the terms of the offer reasonably definite?
2. Statements that usually don’t amount to offers
a. An invitation to bargain is not an offer
i. “There is no way I could sell the condo for less that
$150,000”
b. Letters of intent
c. An advertisement is generally not an offer, merely a request for
offers
3. Problems with Definiteness
a. It is not enough that the offeror indicate that she intends to enter
into an agreement
b. The terms of the offer must also be definite
c. If terms of the offer are vague, then even if the offeree agrees to
the deal, a court does not have enough information to enforce it,
and there is no contract
iii. Termination of Offers
1. Offers can be terminated in four ways
a. Revocation
i. An offer is revoked when the offeror takes it back before
the offeree accepts
ii. The offeror may revoke the offer any time before it has
been accepted
b. Rejection
i. If an offeree rejects an offer, the rejection immediately
terminates the offer
c. Expiration
 i. When an offer species a time limit for acceptance, that
period is binding
ii. If the offer specifies no time limit, the offeree has a
reasonable period in which to accept
d. Operation of Law
i. If an offeror dies or becomes mentally incapacitated, the
offer terminates automatically and immediately
ii. Destruction of the subject matter terminates the offer
iv. Acceptance
1. The offeree must say or do something to accept
2. Mirror Image Rule
a. Requires that acceptance be on precisely the same terms as the
offer
b. If the acceptance contains terms that add or contradict the offer,
even in minor ways, courts generally consider it a counteroffer
c. Consideration
i. There are two basic elements of consideration:
1. Value
a. Consideration requires that both parties to a contract receive a legal
benefit and incur a legal detriment.
b. Legal benefit means receiving something of measurable value
2. Bargained-for-exchange
ii. What is Value
1. Act
a. A party commits an act when she does something, she was not
legally required to do in the first place
2. Forbearance
a. A forbearance is, in essence, the opposite of an act
b. A plaintiff forbears if he agrees not to do something, he had a legal
right to do
3. Promise to Act or Forbear
a. A promise to do (or not do) something in the future counts as
consideration
11. Legality, Consent, and Writing
a. Legality
i. Non-Compete Agreements
1. To be valid, an agreement not to compete must be part of a larger
agreement.
2. The two most common settings for legitimate noncompetition agreements
are the sale of a business and an employment relationship
3. Sale of a Business
a. When a non-compete agreement is ancillary to the sale of a
business, it is enforceable if reasonable in time, geographic area,
and scope of activity
4. Employment
a. In the absence of specific state statutes, non-compete agreements
are enforceable only if they meet all of the following standards
 i. They are reasonable necessary for the protection of the
employer
ii. They provide a reasonable time limit
iii. They have a reasonable geographic limit
iv. They are not harsh or oppressive to the employee
v. They are not contract to public policy
ii. Exculpatory Clauses
1. An exculpatory clause attempts to release you from liability in the event of
injury to another party
2. Courts frequently ignore exculpatory clauses, finding that one party was
forcing the other party to give up legal rights that no one should be forced
to surrender
3. Generally Unenforceable When:
a. An exculpatory clause is generally unenforceable when it attempts
to exclude an intentional tort or gross negligence
i. Gross negligence is carelessness far greater than ordinary
negligence
b. The affected activity is in the public interest, such as medical care,
public transportation, or some essential service
c. When the parties have greatly unequal bargaining power
d. Unless the clause is clearly written and readily visible
iii. Unconscionable Contracts
1. AN unconscionable contract is one that a court refuses to enforce because
of fundamental unfairness
2. Even if a contract does not violate any specific statue or public policy, it may
still be void if it “shocks the conscience” of the court
3. Two factors that most often lead a court to find unconscionability
a. Oppression and
i. One party used it superior power to force a contact on the
weaker party
b. Surprise
i. Meaning that the weaker party did not fully understand the
consequences of its agreement
b. Voidable Contracts: Capacity and Consent
i. Capacity
1. The legal ability of a party to enter a contract in the first place
2. Two groups of people usually lack legal capacity:
a. Minors
i. A voidable contract may be cancelled by the party who lacks
capacity
ii. Disaffirmance
1. A minor who wishes to escape from a contract
generally may disaffirm it – notify the other party
that he refuses to be bound by the agreement
2. Can notify orally, writing, or have a court rescind
the contract
iii. Restitution
 1. A minor who disaffirms a contact must return the
consideration he has received, to the extent he is
able.
2. A minority of states follow the status quo rule,
which provides that if the minor cannot return the
consideration, the adult or store is only required to
return its profit margin to the minor
b. Those with a mental impairment
ii. Consent
1. Whether a contracting party truly understood the terms of the contract and
whether she made the agreement voluntarily
2. Reality of Consent
a. Fraud
i. An injured person must show the following
1. The defendant knew that his statement was false or
that he made the statement recklessly and without
knowledge of whether it was false
a. Opinions and puffery do not amount to
fraud
2. The false statement was material
3. The injured party justifiable relied on the statement
ii. Plaintiff’s Remedies for Fraud
1. In the case of fraud, the injured party generally has
a choice of rescinding the contract or suing for
damages or, in some cases, both
iii. Mistake
1. Unilateral Mistake
a. Occurs when one party enters a contract under a mistaken
assumption
b. To rescind a unilateral mistake, the mistaken party much
demonstrate that he entered the contract because of a basic factual
error and that:
i. The nonmistaken party knew or had reason to know of the
error, or
ii. The mistake is mathematical or mechanical alone, or
iii. Enforcing the contract would be unconscionable
2. Mutual Mistake
a. A mutual mistake occurs when both contracting parties make the
same mistake
b. If the contract is based on fundamental factual error by both
parties, the contract is voidable by either one
iv. Duress
1. True consent is also lacking when one party agrees to a contract under
duress
2. If one party makes an improper threat that causes the victim to enter into a
contract, and the victim had no reasonable alternative, the contract is
voidable
3. In analyzing a claim of economic duress, courts look at these factors
 a. Acts that have no legitimate business purpose
b. Greatly unequal bargaining power
c. An unnaturally large gain for one patty
d. Financial distress to one party
v. Undue Influence
1. To prove undue influence, the injured party must demonstrate two
elements:
a. A relationship between the two parties either of trust or of
domination and
b. Improper persuasion by the stronger party
c. Written Contracts
i. Written Contract
1. The Statute of Frauds requires certain agreements to be in writing to be
enforceable. The agreements that must be in writing are those:
a. For the transfer of an interest in land
i. This means any legal right regarding land
ii. Exceptions
1. Full performance by the seller
2. Part performance by the buyer
a. The buyer of land may be able to enforce an
oral contract if she paid part of the
purchase price and either entered upon the
land or made improvements to it
b. That cannot be performed within one year
i. If it is possible, it doesn’t need to be in writing
c. In which a party promises to pay the debt of another
i. Also called collateral promise
d. Made by an executor of an estate to pay a debt of the estate
e. Made in consideration of marriage, and
f. For the sale of goods of $500 or more
2. A plaintiff may not enforce any of these six types of agreements unless the
agreement or some memorandum of it, is in writing and signed by the
defendant
3. Once a contract is fully executed, it makes no difference that it was
unwritten.
ii. Che Common Law Statute of Frauds: What is a Writing?
1. Written contracts must:
a. Be signed by the defendant; and
b. Must state with reasonable certainty the name of each party, the
subject matter of the agreement, and all of the essential terms and
promises
2. Signatures
a. Using a pen to write one’s name certainly counts, but is not
required
b. E-signatures are valid in all 50 states
c. Almost all states have adopted the Uniform Electronic Transactions
Act (UETA)
 i. Declares that electronic contracts and signatures are as
enforceable as those on paper
d. Electronic Signatures in Global and National Commerce Act (E-Sign)
also declares that contracts cannot be denied enforcement simply
because they are in electronic form, or signed electronically
3. Parol Evidence
a. Parol evidence refers to anything (apart from the written contract
itself) that was said, done, or written before the parties signed the
agreement or as they signed it
b. Integrated contract, which means a writing that the parties intend
as final, complete expression of their agreement
c. The Parol Evidence Rule
i. When two parties make an integrated contract, neither one
may use parol evidence to contradict, vary, or add to its
terms
12. Contract Termination and Remedies
a. Performance and Discharge
i. Terminology
1. A party is discharged when she has no more duties under a contract
2. Parties may agree to rescind their contract, meaning that they terminate it
by mutual agreement
ii. Performance
1. Strict Performance
a. A party is generally not required to render strict performance unless
the contract expressly demands it and such a demand is reasonable
2. Substantial Performance
a. A party that substantially performs its obligations will generally
receive the full contract price, minus the value of any defects
b. A party that fails to perform substantially receives nothing on the
contract itself and will recover only the value of the work, if any
iii. Good Faith
1. Time of the Essence Clause
a. A time of the essence clause will generally make contract deadlines
strictly enforceable
b. Merely including a date for performance does not make time of the
essence
iv. Breach
1. When one party breaches a contract, the other party is discharged
2. Material Breach
a. Courts will discharge a contract only if a party committed a material
breach
b. A material breach is one that substantially harms the innocent party
and for which it would be hard to compensate without discharging
the contract
3. Statute of Limitations
a. A statute of limitations begins to run at the time of injury and will
limit the time within which the injured party may file suit
v. Impossibility
 1. True Impossibility
a. True impossibility means that something has happened making it
literally impossible to do what the promisor said he would do
b. True impossibility is generally limited to these three causes:
i. Destruction of the subject matter
ii. Death of the promisor in a personal services contract
iii. Illegality
2. Commercial Impracticability and Frustration of Purpose
a. Commercial impracticability means some event has occurred that
neither party anticipated and fulfilling the contract would now be
extraordinarily difficult and unfair to one party
b. Frustration of purpose means that some event has occurred that
neither party anticipated, and the contract now has no value for
one party
b. Remedies
i. Remedies
1. A remedy is the method a court uses to compensate an injured party
2. The most common remedy is money damages
3. An interest is a legal right in something
4. There are four principal contract interests that a court may seek to protect
a. Expectation interest
b. Reliance interest
c. Restitution interest
d. Equitable interest
ii. Expectation Interest
1. This is the most common remedy that the law provides for a party injured
by a breach of contract
2. The expectation interest is designed to put the injured party in the position
she would have been in had both sides fully performed their obligations
3. Courts typically divide expectation damaged into three parts
a. Direct Damages
i. Represent harm that flowed directly from the contract’s
breach
b. Consequential Damages
i. Represent harm caused by the injured party’s unique
situation
ii. Courts will generally award these damages if
1. The lost profits were foreseeable and
2. Plaintiff provides enough information so that the
fact finder can reasonably estimate a fair amount
c. Incidental Damages
i. Minor costs such as storing or returning defective goods,
advertising for alternative goods, and so forth
c. Reliance Interest
i. The reliance interest is designed to put an injured party in the position he would
have been had the parties never entered a contract
d. Restitution Interest
 i. When one party breaches a contract, the other may be entitled to recoup what he
put in
ii. The restitution interest is designed to return to the injured party a benefit that he
has conferred on the other party, which it would be unjust to leave with that person
e. Other Remedies
i. Specific Performance
1. A court will award specific performance ordering the parties to perform the
contract – specific performance only in cases involving the sale of land or
some other asset that is considered unique
ii. Injunction
1. An injunction is a court order that requires someone to refrain from doing
something
2. A preliminary injunction is an order issued early in a lawsuit prohibiting a
party from doing something during the course of the lawsuit
3. A preliminary injunction may be granted only upon a showing of
a. Likely irreparable harm and
b. Either
i. A likelihood of success son the merits or
ii. Sufficiently serious questions going to the merits to make
them a fair ground for litigation
f. Special Issues
i. Mitigation of Damages
1. A party injured by a breach of contract may not recover for damages that he
could have avoided with reasonable efforts
2. A party is expected to mitigate his damages; that is, to keep damaged as low
as he reasonably can
ii. Liquidated Damages
1. Liquidated damages clause is a provision stating in advance how much a
party must pay if it breaches
2. A court will generally enforce a liquidated damages clause if
a. At the time of creating the contract, it was very difficult to estimate
actual damages and
b. The liquidated amount is reasonable
13. Practical Contracts
a. Creating a Contract
i. Times when an agreement should be in writing
1. The Statute of Frauds requires it
2. The deal is crucial to your life or the life of your business
3. The terms are complex
4. You do not have an ongoing relationship of trust with the other party
ii. The Lawyer
1. Lawyers and Clients
a. Lawyers are trained to be pessimists – they try to foresee and
protect against everything that can possibly go wrong
b. Lawyers prefer to negotiate touchy subjects at the beginning of a
relationship, when everyone is on friendly terms and eager to make
a deal, rather than waiting until trouble strikes
 c. One advantage of using lawyers to conduct these negotiations is
that they can serve as the bad guys
iii. How to Read a Contract
1. Prereading
a. Spend some time thinking about the provisions that are important
to you
b. If you skip this step, you might find that your attention is so focused
on the specific language of the contract that you lose sight of the
larger picture and what you want
2. Read the contract
3. Go over what-ifs
4. Re-read the contract
iv. Mistakes
1. Vagueness
a. Vagueness means that the parties to a contract deliberately include
a provision that is unclear
b. Vagueness is your enemy
c. The true test of whether a vague clause belongs in a contract:
Would you sign the contract if you knew that the other side’s
interpretation might win in court?
2. Letters of Intent
a. State in the letter that it is not a contract, and that neither side is
bound by it so as not to confuse between an agreement
b. State that it is a memorandum summarizing negotiations thus far,
but that neither party will be bound until a full written contract is
signed
3. Ambiguity
a. Ambiguity means that the provision is accidentally unclear
b. If a contract does contain an ambiguous provision, the courts
interpret it against the drafter of the contract. This rule is meant to:
i. Protect people from the dangers of form contracts that they
have little power to change
ii. Protect people who are unlikely to be represented by a
lawyer.
iii. Encourage those who prepare contracts to do so carefully
4. Scrivener’s Error
a. Fancy word for typo
b. In the case of a scrivener’s error, a court will reform a contract if
there is clear and convincing evidence that the alleged mistake does
not actually reflect the true intent of the parties
5. Preventing Mistakes
a. Let your lawyer draft the contract
b. Resist over-lawyering
c. Read the important terms carefully
i. Before signing a contract, check carefully and thoughtfully
the names of the parties, the dates, dollar amounts, and
interest rates
 d. When your lawyer presents you with a written contract, you should
follow these rules:
i. Complain if your lawyer gives you a contact with provisions
that are irrelevant to your situation
ii. If you do not know what a provision means, ask. If you or
your lawyer does not know, ask him to take it out
iii. A contract is a reference document. During the course of
your relationship with the other party, you may need to
refer to the contract regularly. That will be hard if you do
not understand portions of it, or if the contract is so
disorganized you cannot find a provision when you need it.
b. The Structure of a Contract
i. Terms that Vary by Contract
1. Title
a. Contracts have a title, typically in capital letters, underlined, and
centered at the top of the page. The title should be as descriptive as
possible
b. In the upper right corner, there is a space for the date of the
contract and the subject
2. Introductory Paragraph
a. The introductory paragraph includes that date, the names of the
parties, and the nature of the contract
b. The introductory paragraph must also specific language indicating
that the parties entered into an agreement.
3. Covenants
a. A covenant is a legal term that means a promise in a contract
b. Language of the Covenants
i. To clarify who exactly is doing what, covenants in a contract
should use the active, not passive voice. It should not say
“Artist shall be paid $1.8M”, it should say who is to pay the
artist that money
c. Good Faith
i. Covenants use three standards of behavior
1. Reasonably – means ordinary or usual under the
circumstances
2. Good Faith – an honest effort to meet both the
spirit and letter of the contract
3. Sole Discretion – has the absolute right to make any
decision on that issue
d. Reciprocal Promises and Conditions
i. Reciprocal Promises – each line item is each enforceable
independently
ii. Conditional – a party agrees to perform them only if the
other side also does what is promised
4. Representations and Warranties
a. Convents are the promises the parties make about what they will do
in the future.
 b. Representations and warranties are statements of fact about the
past or present; they are true when the contract is signed
c. In a contract between two companies, each side will generally
represent and warrant facts such as: They legally exist, have the
authority to enter the contract, etc.
ii. Boilerplate
1. Choice of Law and Forum
a. Choice of law provisions determine which state’s laws will be used
to interpret the contract
b. Choice of forum provisions determine the state in which any
litigation would take place
2. Modification
a. Contracts should contain a provision governing modification
b. A rider is another term for amendment or addition
c. If a contract has a provision requiring that amendments be in
writing, there are three ways to amend it
i. Signing an amendment (or rider)
ii. Crossing out the wrong language and replacing it by hand
with the correct terms. It is good practice for both parties to
initial such changes
iii. Rewriting the entire contract to include the provisions. The
contract is then generally renamed to include amended or
restates agreement. This method is most appropriate if
there are many complex alterations
3. Assignment of Rights and Delegation of Duties
a. An assignment or rights is a transfer of the benefits under a contract
to another person
b. Delegation of duties is a transfer of the obligations under a contract
4. Arbitration
a. There is some evidence that arbitrators tend to favor businesses,
who are likely to have many cases, over consumers who may only
have one
5. Severability
a. If, for whatever reason, some part of the contract turns out to be
unenforceable, a severability provision asks the court simply to
delete the offending clause and enforce the rest of the contract
6. Force Majeure
a. A force majeure event is a disruptive, unexpected occurrence for
which neither party is to blame and that prevents one or both
parties from complying with the contract
7. Closing
a. If an individual signs her own name without indicating that she is
doing so in her role as an employee of Winterfield Productions, INC.,
she will be personally liable
14. The UCC: Sales and Secured Transactions
a. Development of the UCC
i. Problems that led to the UCC
1. Old contract law principles often did not reflect modern business practices
 2. Contract law varied from one state to another, creating unnecessary
confusion
ii. Article 2
1. UCC 2-102 applies to the sale of goods. Goods are things that are movable,
other than money and investment securities
2. Regulates sales only, where one party transfers title to the other in
exchange for money
iii. Mixed Contracts
1. In a mixed contract involving sales and services, the UCC will govern if the
predominant purpose is the sale of goods, but the common law will control
if the predominant purpose is providing services
iv. Merchants
1. A merchant is someone who routinely deals in the particular goods
involved, or who appears to have special knowledge or skill in those goods,
or who uses agents with special knowledge or skill in those goods
2. The UCC frequently holds a merchant to a higher standard of conduct than a
non-member
b. UCC Contract Formation
i. Formation Basics: 2-204
1. Provides three important rules that enable parties to make a contract
quickly and informally
a. Any manner that shows agreement
b. Moment of making is not critical
i. The UCC will enforce a deal even though it is difficult to say
exactly when it was formed
c. One or more terms may be left open
i. Under the UCC, a court may enforce a bargain even though
one or more terms were left open
ii. State of Frauds
1. UCC 2-201 requires a writing for any sale of goods of $500 or more
2. Writing Sufficient to Indicate a Contract
a. The writing itself does not need to be a contract
b. In general, the writing must be signed by the defendant
3. Enforceable Only to the Quantity States
a. The code will enforce the contract only up to the quantity of goods
stated in writing
4. Exceptions
a. Merchant Exception
i. When two merchants make an oral contract, and one send
a confirming memo to the other within a reasonable time,
and the memo is sufficiently definite that is could be
enforced against the sender herself, then the memo is also
valid against the merchant who receives it, unless he
objects within ten days
b. Specially Made Goods
i. If a buyer orders goods that are to be specially
manufactured for the buyer and are not suitable for sale to
 others in the ordinary course of the seller’s business, then a
verbal agreement is enforceable even if it exceeds $500
iii. Section 2-207: Added Terms
1. Under 2-207, an acceptance that adds or alters terms will often create a
contract
2. Additional or Different Terms
a. Additional Terms
i. Additional terms are those that raise issues not covered in
the offer
ii. When both parties are merchants, additional terms
generally become part of the bargain
b. Different Terms
i. Different terms are terms that contradict those in the offer
ii. Different terms cancel each other out
iii. If there is no clear oral agreement, the Code supplies its
own terms, called gap-fillers
iv. The parties had not orally agreed on a warranty, so a court
would enforce the Code’s gap-filler warranty, which does
permit recovery of compensatory and consequential
damages
c. Performance and Remedies
i. Buyer’s Remedies
1. Conforming goods satisfy the contract terms. Non-conforming goods do not
2. When the buyer rejects non-conforming goods, the seller has the right to
cure, by delivering conforming goods before the contract deadline
3. Cover
a. If the seller breaches, the buyer may cover by reasonably obtaining
substitute goods; it may then obtain the difference between the
contract price and its cover price, plus incidental and consequential
damages, minus expenses saved
4. Incidental and Consequential Damages
a. Incidental damages cover such costs as advertising for
replacements, sending buyers to obtain new goods, and shipping
the replacement goods.
b. Consequential damages are those resulting from the unique
circumstances of this injured party
d. Warranties
i. Express Warranties
1. A warranty is a contractual assurance that goods will meet certain standards
2. An express warranty is one that the seller creates with his words or actions
3. A disclaimer is a statement that a particular warranty does not apply
4. Written express warranties generally cannot be disclaimed
ii. Implied Warranties
1. Implied Warranty of Merchantability
a. Merchantable means that the goods are fit for the ordinary purpose
for which they are used
b. Several Important Principles
 i. Unless excluded or modified means that the seller does
have a chance to escape this warranty. A seller may disclaim
this warranty provided he actually mentions the word
merchantability. A seller also has the option to disclaim all
warranties by stating that the goods are sold as is or with all
faults
ii. Merchantability requires that goods be fit for their normal
purposes
iii. Implied means that the law itself imposes this liability on
the seller
iv. A merchant with respect to goods of that kind means that
the seller is someone who routinely deals in these goods or
holds himself out as having special knowledge about these
goods
2. Implied Warranty of Fitness for a Particular Purpose
a. The other warranty that the UCC imposes on sellers is the implied
warranty of fitness for a particular purpose – called a warranty of
fitness
b. Where the seller at the time of contracting knows about a particular
purpose for which the buyer wants the goods, and knows that the
buyer is relying on the seller’s skill or judgement, there is an implied
warranty that the goods shall be fit for such purpose
3. Consumer Sales
a. Many states prohibit a seller from disclaiming implied warranties in
the sale of consumer goods
e. Secured Transactions
i. Article 9: Terms and Scope
1. Article 9 of the UCC governs secured transactions in personal property
2. ½ of all UCC lawsuits involve article 9
3. Article 9 Vocabulary
a. Fixtures are goods that have become attached to real estate
b. Security interest means an interest in personal property or fixtures
that secures the performance of some obligation
c. Secured party is the person or company that holds the security
interest
d. Security agreement is the contract in which the debtor gives a
security interest to the secured party
e. Perfection is a series of steps the secured party must take to protect
its rights in the collateral against people other than the debtor
ii. Attachment of a Security Interest
1. Attachment means that the secured party has taken all the following steps
to create an enforceable security interest
a. The two parties made a security agreement, and either the debtor
has authenticated a security agreement describing the collateral or
the secured party has obtained possession or control
b. The secured party has given value to obtain the security agreement
c. The debtor has rights in the collateral
2. Agreement
 a. Without an agreement, there can be no security interest
3. Perfection
a. Perfection by Filing
i. The most common way to perfect an interest is by filing a
financing statement with one or more agencies
ii. A financing statement gives all the names of all parties,
describes the collateral, and outlines the security interest,
enabling any interested person to learn about it
iii. Financing statement is UCC-1
b. Contents of the Financing Statement
i. A financing statement is sufficient if it provides the name of
the debtor, the name of the secured party, and an
indication of the collateral
ii. Trade names are not ok for organizations
c. Place of filing
i. A secured party must file in the state of the debtor’s
location
ii. Article 9 prescribes central filing within the state for most
types of collateral.
d. Duration of Filing
i. Once a financial statement has been filed, it is effective for
five years
ii. After 5 years, the statement will expire unless you file a
continuation statement within six months prior to
expiration
e. Perfection of Consumer Goods
i. The UCC gives special treatment to security interests in
most consumer goods
ii. A purchase money security interest (PMSI) is one taken by
the person who sells to collateral or by the person who
advances money so the debtor can buy the collateral
iii. A PMSI in consumer goods perfects automatically, without
filing
iii. Protection
1. Protection of Buyers
a. Generally, once a security interest is perfected, it remains effective
regardless of whether the collateral is sold, exchanged, or
transferred in some other way
b. The Code gives buyers in the ordinary course of business (BIOC)
special protection
c. A buyer in ordinary course of business takes the goods free of a
security interest created by its seller even though the security
interest is perfected
d. The BIOC exception is designed to encourage ordinary commerce
2. Priorities Among Creditors
a. A party with a perfected security interest takes priority over a party
with an unperfected interest
 b. If neither secured party has perfected, the first interest to attach
gets priority
c. Between perfected security interest, the first to file or perfect wins
3. Default and Termination
a. Default
i. Generally, a debtor defaults when he fails to make
payments due or enters bankruptcy proceedings.
ii. When a debtor defaults, the secured party has two principal
options
1. It may take possession of the collateral or
2. It may file suit against the debtor for the money
owed
iii. The secured party doesn’t have to choose between one or
the other. If one doesn’t work, it may try the other
b. Taking Possession of the Collateral
i. When the debtor defaults, the secured party may take
possession of the collateral, provided this can be done
without a breach of peace
c. Disposition of the Collateral
i. The secured party may sell, lease, or otherwise dispose of
the collateral in any commercially reasonable manner
ii. The debtor is liable for any deficiency
4. Termination
a. When the debtor pays the full debt, the secured party must
complete a termination statement, called UCC-3
15.
16. Bankruptcy
a. Overview
i. Chapter 7
1. Liquidation
2. The bankrupt’s assets are sold to pay creditors. If the debtor owns a
business, it terminates. The creditors have no right to the debtor’s future
earnings
ii. Chapter 11
1. Reorganization
2. This chapter is designed for businesses and wealthy individuals. Businesses
continue in operation, and creditors receive a portion of the debtor’s
current assets and future earnings
iii. Chapter 13
1. Consumer Reorganization
2. Offers reorganization for the typical individual. Creditors usually receive a
portion of the individual’s current assets and future earnings.
iv. Goals
1. The bankruptcy code has three primary goals
a. To preserve as much of the debtor’s property as possible
b. TO divide the debtor’s assets fairly between the debtor and
creditors
c. To divide the creditors’ share of the assets fairly among them
b. Chapter 7 – Liquidation
i. Filing a Petition
1. Any individual, partnership, corporation, or other business organization that
lives, conducts business, or owns property in the United States can file
under the code.
2. A case begins with the filing of a bankruptcy petition in federal district court.
3. Voluntary Petition
a. Any debtor has the right to file for bankruptcy. It is not necessary
that the debtor’s liabilities exceed assets
b. Individuals must meet two requirements before filing
i. Within 180 days before the filing, an individual debtor must
undergo credit counseling with an approved agency
ii. Individual debtors may only file under Chapter 7 if they earn
less than the median income in their state or they cannot
afford to pay back at least $7,700 over 5 years. Generally, all
other debtors must file under Chapter 11 or 13
c. The voluntary petition must include the following documents
i. Petition
ii. List of creditors
iii. Schedule of assets and liabilities
iv. Claim of exemptions
v. Schedule of income and expenditures
vi. Statement of financial affairs
4. Involuntary Petition
a. Creditors may force a debtor into bankruptcy by filing an
involuntary petition
b. An involuntary petition must meet all of the following requirements
i. The debtor must owe at least $15,775 in unsecured claims
to the creditors who file.
ii. If the debtor has at least 12 creditors, 3 or more must sign
the petition. If the debtor has fewer than 12 creditors, any
one of them may file a petition.
iii. The creditors must allege either that a custodian for the
debtor’s property has been appointed in the prior 120 days
or that the debtor has generally not been paying debts that
are due.
ii. Trustee
1. The trustee is responsible for gathering the bankrupt’s assets and deciding
them among creditors
2. If the creditors do not elect a trustee, then the U.S. Trustee makes the
selection
iii. Creditors
1. After the court issues a order for relief, the US Trustee calls a meeting of all
the creditors
2. After the meeting of creditors, unsecured creditors must submit a proof of
claim. This document is a simple form stating the name of the creditor and
the amount of the claim
 3. Secured creditors do not file proofs of claim unless the claim exceeds the
value of their collateral
iv. Automatic Stay
1. An automatic stay prohibits creditors from collecting debts that the
bankrupt incurred before the petition was filed.
2. Creditors may not sue a bankrupt to obtain payment, nor may they take
other steps, outside of court, to pressure the debtor for payment
v. Bankruptcy Estate
1. The filing of the bankruptcy petition creates a new legal entity separate
from the debtor – the bankruptcy estate
2. Exempt Property
a. The code permits individual debtors to keep some property for
themselves
b. Under the federal Code, a debtor is allowed to exempt only $23,675
of the value of her home. If the house is worth more than that, the
trustee sells it and returns $23,675 of the proceeds to the debtor.
Most states exempt items such as the debtor’s home, household
goods, cars, work tools, disability and pension benefits, alimony,
and health aids.
3. Voidable Preferences
a. A major goal of the bankruptcy system is to divide the debtor’s
assets fairly among creditors
b. Transfers before bankruptcy is filed are called preferences because
they give unfair preferential treatment to some creditors.
c. The trustee has the right to void such preferences
d. The trustee can void any transfer (whether payment or lien) that
meets all of the following requirements:
i. The transfer was to a creditor of the bankrupt.
ii. It was to pay an existing debt.
iii. The creditor received more from the transfer than she
would have received during the bankruptcy process.
iv. The debtor’s liabilities exceeded assets at the time of the
transfer.
v. The transfer took place in the 90-day period before the
filing of the petition.
vi. In addition, the trustee can void a transfer to an insider that
occurs in the year preceding the filing of the petition.
Insiders are family members of an individual, officers and
directors of a corporation, or partners of a partnership that
has filed for bankruptcy.
4. Fraudulent Transfers
a. A transfer is fraudulent if it is made within the year before a petition
is filed and its purpose is to hinder, delay, or defraud creditors
b. A trustee cannot void pre-petition payments made in the ordinary
course
vi. Payment of Claims
1. All claims are placed in one of three classes
a. Secured claims
 b. Priority claims
i. There are seven subcategories of priority claims. Each is
paid in order with the first group receiving all payment
before the next group receives anything.
1. Alimony and child support
2. Administrative expenses
3. Gap expenses
a. Expenses a business incurs in the ordinary
course of business after an involuntary
petition until the order for relief
4. Payment to employees
5. Employee benefit plans
6. Consumer deposits
7. Taxes
8. DUI injuries
c. Unsecured claims
i. Secured claims that exceed the value of the available
collateral
ii. Priority claims that exceed the priority limits
iii. All other unsecured claims
vii. Discharge
1. Debts that cannot be discharged
a. Income taxes for the three years prior to filing and property taxes
for the prior year
b. Money obtained fraudulently
c. Any loan of more than $675 that a consumer uses to purchase
luxury goods within 90 days before the order for relief is granted
d. Cash advances on a credit card totaling more than $950, that an
individual debtor takes out within 70 days before the order for relief
e. Debts omitted from the Schedule of Assets and Liabilities that the
debtor filed with the petition, if the creditor did not know about the
bankruptcy and therefore did not file a proof of claim
f. Money that the debtor stole or obtained through a violation of his
fiduciary duty
g. Money owed for alimony or child support
h. Debts stemming from intentional and malicious injury
i. Fines and penalties owed to the government
j. Liability for injuries caused by the debtor while operating a vehicle
under the influence of drugs or alcohol. (Yet another reason why
friends don’t let friends drive drunk.)
k. Liability for breach of duty to a bank
l. Debts stemming from a violation of securities laws
m. Student loans
2. Undue Hardship – Brunner Test
a. A student loan will be discharged if:
i. The debtor cannot maintain, based on current income and
expenses, a minimal standard of living for himself and his
dependents if forced to repay the loans;
 ii. This state of affairs is likely to persist for a significant
portion of the repayment period of the student loans; and
iii. The debtor has made good-faith efforts to repay the loans.
3. Circumstances that Prevent Debts from Being Discharged
a. Business organizations.
i. Under Chapter 7 (but not the other chapters), only the
debts of individuals can be discharged, not those of
business organizations. Once its assets have been
distributed, the organization must cease operation. If it
continues in business, it is responsible for all pre-petition
debts.
b. Revocation. A court can revoke a discharge within one year if it
discovers the debtor engaged in fraud or concealment.
c. Dishonesty or bad faith behavior.
d. Repeated Filings for Bankruptcy
i. a debtor who has received a discharge under Chapter 7 or
11 cannot receive another discharge under Chapter 7 for at
least eight years after the prior filing. And a debtor who has
received a prior discharge under Chapter 13 cannot, in most
cases, receive one under Chapter 7 for at least six years.
e. Reaffirmation
i. Sometimes debtors are willing to reaffirm a debt, meaning
they promise to pay even after discharge. They may want to
reaffirm a secured debt to avoid losing the collateral
ii. To be valid, reaffirmation must
1. Not violate common law standards for fraud,
duress, or unconscionability. If creditors force a
bankrupt into reaffirming a debt, the reaffirmation
is invalid.
2. Have been filed in court before the discharge is
granted.
3. Include the detailed disclosure statement required
by the statute (§524).
4. Be approved by the court if the debtor is not
represented by an attorney or if, as a result of the
reaffirmed debt, the bankrupt’s expenses exceed
his income.
c. Chapter 11 Reorganization
i. Businesses usually prefer Chapter 11 over 7 because 11 does not require the to
dissolve at the end, as chapter 7 does
ii. Debtor in Possession
1. Chapter 11 does not require a trustee. The bankrupt is called the debtor in
possession and, in essence, serves as trustee. The debtor in possession has
two jobs: to operate the business and to develop a plan of reorganization.
iii. Confirmation of the Plan
1. Anyone who proposes a plan of reorganization must also prepare a
disclosure statement to be distributed with the plan. The purpose of this
 statement is to provide creditors and shareholders with enough information
to make an informed judgment. The statement describes the company’s
business, explains the plan, calculates the company’s liquidation value, and
assesses the likelihood that the debtor can be rehabilitated.
2. All the creditors and shareholders have the right to vote on the plan of
reorganization.
3. The court will approve a plan if a majority of the debtors in each class votes
in favor of it and if the “yes” votes hold at least two-thirds of the total debt
in that class.
4. As long as at least one class votes in favor of the plan, the court can confirm
it over the opposition of other classes in what is called a cramdown
iv. Discharge
1. The debtor now owns the assets in the bankruptcy estate, free of all
obligations except those listed in the plan.
d. Chapter 13 Consumer Reorganizations
i. The purpose of Chapter 13 is to rehabilitate an individual debtor. It is only available
to individuals with less than $394,725 in unsecured debts and $1,184,200 in secured
debts.
ii. Beginning a Chapter 13 Case
1. To initiate a Chapter 13 case, the debtor must file a voluntary petition.
Creditors cannot use an involuntary petition to force a debtor into Chapter
13.
2. For the service, a trustee is allowed up to 10% of the payments
iii. Plan of Payment
1. Under the plan, the debtor must
a. commit some future earnings to pay off debts,
b. promise to pay all secured and priority claims in full, and
c. treat all remaining classes equally.
2. If the plan does not provide for the debtor to pay off creditors in full, then
all of the debtor’s disposable income for the next five years must go to
creditors.
3. to confirm a plan, the court must ensure that:
a. The creditors have the opportunity to voice their objections at a
hearing,
b. All of the unsecured creditors receive at least as much as they
would have if the bankruptcy estate had been liquidated under
Chapter 7,
c. The plan is feasible, and the bankrupt will be able to make the
promised payments,
d. The plan does not extend beyond three years without good reason
and in no event lasts longer than five years, and
e. The debtor is acting in good faith, making a reasonable effort to pay
obligations.
iv. Discharge
1. The debtor is washed clean of all pre-petition debts except those provided
for in the plan but, unlike Chapter 7, the debts are not permanently
discharged
17. Agency Law
a. The Agency Relationship
i. Creating an Agency Relationship
1. To create an agency relationship, there must be:
a. A principal
i. A person who has someone else acting for him
b. An agent
i. A person who acts for someone else
c. Who mutually consent that the agent will act on behalf of the
principal and,
d. Be subject to the principal’s control
e. Thereby creating a fiduciary relationship
i. A
2. Elements Not Required for an Agency Relationship
a. The following elements are not required for an agency relationship
i. Written Agreement
1. In most cases, an agency agreement does not have
to be in writing
2. The equal dignities rule says that if an agent is
empowered to enter into a contract that must be in
writing, then the appointment of the agent must
also be written
ii. Formal Agreement
1. The principal and agent need not agree formally
that they have an agency relationship
iii. Compensation
1. An agency relationship need not meet all the
standards of contract law
ii. Duties of Agents to Principals
1. Duty of Loyalty
a. An agent has a fiduciary duty to act loyally for the principal’s benefit
in all matters connected with the agency relationship
b. Outside Benefits
i. An agency may not receive profits unless the principal
knows and approves
c. Confidential Information
i. Agents can neither disclose nor use for their own benefit
any confidential information they acquire during their
agency
d. Competition with the Principal
i. Agents are not allowed to compete with their principal in
any matter within the scope of the agency business
e. Conflict of Interest between Two Principals
i. Unless otherwise agreed, an agent may not act for two
principals whose interests’ conflict
f. Secretly Dealing with the Principal
i. If a principal hires an agent to arrange a transaction, the
agent may not become a party to the transaction without
the principal’s permission
 g. Appropriate Behavior
i. An agent may not engage in inappropriate behavior that
reflects badly on the principal
2. Other Duties of an Agent
a. Duty of Obey Instructions
i. An agent must obey her principal’s instruction unless the
principal directs her to behave illegally or unethically
b. Duty of Care
i. An agent has a duty to act with reasonable care
ii. An agent with special skills is held to a higher standard
because she is expected to use those skills
iii. A gratuitous agent is held to a lower standard because he is
doing his principal a favor
iv. Gratuitous agents are liable if they commit gross
negligence, but not ordinary negligence
c. Duty to Provide Information
i. An agent has a duty to provide the principal with all
information in her possession that she has reason to believe
the principal wants to know.
ii. She also has a duty to provide accurate information
3. Principals Remedies When the Agent Breaches a Duty
a. Damages
b. Profits
c. Rescission
iii. Duties of Principals to Agents
1. Duty to Indemnify
a. A principal must indemnify an agent for any expenses or damages
reasonable incurred in carrying out his agency responsibilities
b. A principal must indemnify an agent for tort claims brought by a
third party if the principal authorized the agent’s behavior and the
agent did not realize he was committing a tort
c. The principal must indemnify the agent for an liability to third
parties that the agent incurs as a result of entering into a contract
on the principal’s behalf, including attorney’s fees and reasonable
settlements
2. Duty to Cooperate
a. Principals have a duty to cooperate with their agent
i. The principal must furnish the agent with the opportunity to
work
ii. The principal cannot unreasonable interfere with eh agent’s
ability to accomplish his task
iii. The principal must perform her part of the contract
iv. Terminating an Agency Relationship
1. Termination by Agent and/or Principal
a. Two parties have these choices in terminating their relationship
i. Term Agreement
1. Time
2. Achieving a purpose
 3. Mutual agreement
ii. Agency at Will
iii. Wrongful Termination
b. Either party always has the power to terminate. They may not,
however, have the right.
2. Principal or Agent Can No Longer Perform Required Duties
a. Either the agent or the principal fails to obtain a required license
b. The bankruptcy of the agent or the principal affects their ability to
perform required duties
c. Either the principal or the agent dies or becomes incapacitated
d. The agent violates her duty of loyalty
3. Change in Circumstances
a. If these changes are significant enough to undermine the purpose of
the agreement, the relationship ends automatically
i. War
ii. Change of Law
iii. Loss or destruction of subject matter
4. Effect of Termination
a. Once an agency relationship ends, the agent no longer has the
authority to act for the principal. If she continues to act, she is liable
to the principal for any damages he incurs as a result
b. Some duties of both the principal and agent continue after the
relationship ends:
i. Principals duty to indemnify agent
ii. Confidential information
b. Liability to Third Parties
i. Principals Liability for Contracts
1. The principal is liable for the acts and statements of his agent if
a. The agent had authority or
b. The principal ratified the acts of the agent
2. Authority
a. A principal is bound by the acts of an agent if the agent had
authority
i. Express Authority
1. The principal grants express authority by words or
conduct that, reasonable interpreted, case the
agent to believe the principal desires her to act on
the principal’s account
ii. Implied Authority
1. Unless otherwise agreed, authority to conduct a
transaction includes authority to do acts that are
reasonably necessary to accomplish it
iii. Apparent Authority
1. A principal can be liable for the acts of an agent
who is not, in fact, acting with authority if the
principal’s conduct causes a third party reasonable
to believe that the agent is authorized
3. Ratification
 a. If a person accepts the benefit or an unauthorized transaction or
fails to repudiate it, then he is as bound by the act if he had
originally authorized it
b. Even if an agent acts without authority, the principal can decide
later to be bound by her actions as long as these requirements are
met:
i. The agent indicated to the third party that she is acting for a
principal
ii. The principals knows all the material facts of the transaction
iii. The principal accepts the benefit of the whole transaction,
not just part
iv. The third party does not withdraw from the contract before
ratification
4. Subagents
a. An intermediary agent is someone who hires subagents for the
principal
b. When an agent is authorized to hire a subagent, the principal is as
liable for the acts of the subagent as he is for the acts of a regular
agent
ii. Agent’s Liability for Contracts
1. Fully Disclosed Principal
a. An agent is not liable for any contracts that she makes on behalf of
a fully disclosed principal.
b. A principal is fully disclosed if the third party knows of his existence
and his identity
c. To avoid liability when signing a contract on behalf of a principal, an
agent must clearly state that she is an agent and also must identify
the principal
2. Unidentified Principal
a. In the case of an unidentified principal, the third party can recover
from either the agent of the principal
b. A principal is unidentified if the third party knew of his existence but
not his identity
3. Undisclosed Principal
a. In the case of an undisclosed principal, the third party can recover
from either the agent or the principal.
b. The principal is always liable, but the agent is only liable when the
principal’s identity is unknown
c. A third party is not bound to the contract with an undisclosed
principal if:
i. The contract specifically provides that the third party is not
bound to anyone other than the agent or
ii. The agent lies about the principal because she knows that
the third party would refuse to contract with him
4. Unauthorized Agent
a. If the agent has no authority, the principal is not liable to the third
party, and the agent is
iii. Principals Liability for Negligent Physical Torts
 1. An employer is liable for physical torts negligently committed by an
employee acting within the scope of employment
2. Respondeat Superior is Latin for “let the master answer”
3. Employee
a. Generally, a principal is liable for the physical torts of an employee
but is not liable for the physical torts of an independent contractor
b. When determining if agents are employees or independent
contractors, courts consider:
i. The principal supervises details of the work.
ii. The principal supplies the tools and place of work.
iii. The agents work full time for the principal.
iv. The agents receive a salary or hourly wages, not a fixed
price for the job.
v. The work is part of the regular business of the principal.
vi. The principal and agents believe they have an employer–
employee relationship.
vii. The principal is in business.
c. Negligent Hiring
i. A principal is liable for both the negligent and intentional
physical torts of an independent contractor if the principal
has been negligent in hiring or supervising her
4. Scope of Employment
a. An employee is acting within the scope of employment if the act:
i. Is one that employees are generally responsible for,
ii. Takes place during hours that the employee is generally
employed,
iii. Is part of the principal’s business,
iv. Is similar to the one the principal authorized,
v. Is one for which the principal supplied the tools, and
vi. Is not seriously criminal.
b. Authorization
i. An act is within the scope of employment, even if expressly
forbidden, if it is of the same general nature as that
authorized or if it is incidental to the conduct authorized
c. Abandonment
i. The principal is liable for the actions of the employee that
occur while the employee is at work, but not for actions
that occur after the employee has abandoned the
principal’s business
iv. Principal’s Liability for Intentional Physical Torts
1. A principal is not liable for the intentional physical torts of an employee
unless
a. The employee intended to serve some purpose of the employer or
b. The employer was negligent in hiring or supervising this employee
v. Principal’s Liability for Nonphysical Torts
1. A nonphysical tort is one that harms only reputation, feelings, or wallet.
 2. Nonphysical torts (whether intentional or unintentional) are treated like a
contract claim: The principal is liable only if the employee acted with
express, implied, or apparent authority
vi. Agent’s Liability for Torts
1. Agents are always liable for their own torts.
2. Agents who commit torts are personally responsible, whether or not their
principal is also liable
3. Even if the tort was committed to benefit the principal, the agent is still
liable
18. Employment and Labor Law
a. Employment at Will
i. Employees can be fired at will unless there is specific legal specifications stating
otherwise
b. Employment Security
i. Common Law Protections
1. Wrongful Discharge
a. The public policy rule prohibits an employer from firing a worker for
a reason that violates the fundamental social rights, duties, or
responsibilities
2. Tort Law
a. Defamation
i. Employers may be liable for defamation when they give
false references about an employee
ii. More than half of the states recognize a qualified privilege
for employers who give references about former
employees.
iii. A qualified privilege means that employers are liable only
for false statements that they know to be false or that are
primarily motivated by ill will
iv. Generally, courts have held that employers do not have a
legal obligation to disclose information about former
employees, but in the case of violence, they are divided
ii. Family and Medical Leave Act
1. The Family and Medical Leave Act (FMLA) guarantees both men and women
up to 12 weeks of unpaid leave each year for childbirth, adoption, or a
serious health condition of their own or in their immediate family.
2. The FMLA applies only to companies with at least 50 workers and to
employees who have been with the company full time for at least a year
c. Workplace Freedom
i. Off-Duty Activities
1. Lifestyle Laws
a. A few states, such as California, have passed lifestyle laws that
protect the right of employees to engage in any lawful activity or
use any lawful product when off duty
2. Smoking
a. 60% of the states don’t allow employers to prohibit employees from
smoking
3. Alcohol and Drug Use
 a. the Equal Employment Opportunity Commission (EEOC), the federal
agency charged with enforcing federal employment laws, prohibits
testing for prescription drugs unless a worker seems impaired
ii. The Right to Free Speech
1. The National Labor Relations Act
a. The NLFA protects all employees
i. Who engage in collective activity
ii. Relating to work conditions and
iii. Who are not supervisors
2. Social Media Policies
a. Policies violate the NLRA if they unreasonable limit employee
speech about work conditions
b. To be protected, employee speech must be concerted
d. Financial Protection
i. Fair Labor Standards Act – 1938
1. Regulates wages and limits child labor nationally
ii. Health Insurance
1. Under the consolidated Omnibus Budget Reconciliation Act (COBRA), former
employees must be allowed to continue their health coverage for 18
months after leaving their job
iii. Social Security
1. The social security system pays benefits to workers who are retired,
disabled, or temporarily unemployed, and to the spouses and children of
disabled or deceased workers.
2. A worker who quits voluntarily or is fired for just cause is ineligible for
unemployment benefits
iv. Pensions
1. In 1974, Congress passed the Employee Retirement Income Security Act
(ERISA) to protect workers covered by private pension plans
19. Employment Discrimination
a. Employment Opportunity Before 1964
i. 13th amendment prohibits slavery
ii. 14th guarantees due process of the law and equal protection under the law
iii. 15th prohibits restrictions on the right to vote because of race or color
iv. The Civil Rights Act of 1866
1. Interpreted to prohibit racial discrimination in private and public
employment, but DID NOT apply to the federal government
b. Civil Rights Act of 1964
i. Disparate Treatment: The person is treated less favorably because of a protected
status
1. Prime Facie: Something that appears to be true upon a first look
ii. Disparate Impact: This applies if, on its face, the policy is not discriminatory, but in
practice excludes too many people in a protected category
iii.