Business Law 5 parts

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Key Terms

Click on each key term to see the de�inition.

attachment (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Seizure of personal property by a court-appointed of�icial, usually the sheriff.

bad debt (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Debt that is not collectible by the creditor.

choses in action (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The right to bring a lawsuit to recover chattels, money, or a debt.

collateral (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Personal property that can be sold if the debtor defaults to make the creditor whole. Also known as security.

default (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

When a debtor fails to make payments on a loan.

Fair Debt Collection Practices Act (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A federal law enacted in 1978 (15 U.S.C. § 1692) that regulates how businesses must act when collecting debts from consumers, to curb abusive debt collection practices.

garnishment (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Obtaining an interest from a third party (e.g., an employer) in the debtor's property or wages.

judgment (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An order by a court to pay.

judgment lien (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An interest acquired by the creditor in the debtor's real or personal property as the result of a judgment.

levy on earnings (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An interest acquired by the creditor in the debtor's wages as the result of a judgment; results in the garnishment of the debtor's pay.

lien (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An interest in the debtor's property.

litigants (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Parties to a lawsuit; the plaintiff and defendant.

mortgage (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An interest that the creditor (mortgagee) has in the debtor's real property.

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personal property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

All property other than real property.

postjudgment (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The phase of a lawsuit after a judgment has been entered in court.

prejudgment (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The phase of a lawsuit before a judgment has been entered in court.

real property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Land and all things �irmly af�ixed to land.

secured debt (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A debt that gives the creditor certain rights in property such that if the debtor defaults, the creditor can sell the property to recover all or part of the loan amount.

secured loan (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A loan that has collateral (security) in its terms in order to secure payment in case of a default by the debtor.

secured transaction (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A loan governed by Article 9 of the UCC.

unsecured debt (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A debt without any collateral guaranteeing its payment.

unsecured loan (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A loan without any collateral guaranteeing its payment.

writ of attachment (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An order by the court to seize some of the debtor's property.

writ of execution (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An order by the court to place a lien on a debtor's personal property.

writ of garnishment (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An order by the court to seize some of the debtor's property from a third party, e.g., an employer.

Chapter 16 Flashcards

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Critical Thinking and Discussion Questions

1. What is the difference between a secured debt and an unsecured debt? What law covers secured debts?

2. What do the terms prejudgment, judgment, and postjudgment mean? What is the signi�icance of each?

3. What is a lien? How does a lien help a creditor collect on a debt?

4. Suppose that a creditor sued a debtor for failure to pay on an unsecured debt. At the end of the trial, if the creditor was successful, what would the creditor receive from the court? Would the creditor then have money from the debtor? Why or why not?

5. As a businessperson, what would be your concerns if you received a writ of garnishment from the court? Why? What steps could you take to ensure that the writ was authentic?

6. Review the Writ of Garnishment in Figure 16.1. Who is the garnishee on the writ? What is the garnishee ordered to do by the writ? What happens if the garnishee does not follow the instructions on the writ?

7. Alexander Home Supply Company entered into a contract with the Fabulous Marble Company in which Fabulous was supposed to ship marble to Alexander on March 1, 2012. However, Fabulous breached the contract and never shipped the goods. As a result, Alexander suffered a loss of more than $150,000 and now wishes to sue Fabulous. a. Assume that Fabulous has �iled for bankruptcy in the past and is still �inancially unstable. How could Alexander determine whether it was worth pursuing a civil lawsuit against Fabulous?

b. Assume that Alexander has investigated the �inancial status of Fabulous and has decided that the latter has enough assets to make it worth pursuing a case in court. What steps could Alexander take before �iling the lawsuit to ensure that if it won a judgment, the money would be available for collection?

c. Assume that Alexander did not take any steps before litigation but did eventually win a $150,000 judgment in court. Fabulous refuses to pay the money. What steps can Alexander take to collect the judgment from Fabulous?

Seizure of personal property by a court-appointed official, usually the sheriff.

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Chapter 17

Secured (Article 9) Transactions As discussed in Chapter 16 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch16#ch16) , a large portion of business transactions at the wholesale and retail levels is done on a credit basis. Some of these involve unsecured debts, such as transactions paid by credit cards or unsecured personal bank loans (also called signature loans). When large loan amounts are involved, or when dealing with consumers or businesses whose credit histories make them bad risks, sellers often protect themselves by retaining a security interest in the goods sold, or in other personal property belonging to the debtor, as collateral (security) in the event that the debtor defaults on the debt.

Recall that the Uniform Commercial Code (UCC) is divided into articles. Most relevant to the business environment are Article 2, which covers sales contracts (see Chapter 10 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch10#ch10) ); Articles 3 and 4 (see Chapters 12 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch12#ch12) and 15 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec15.1#sec15.1) , respectively), which cover negotiable instruments and banks; and Article 9 (the subject of this chapter), which covers secured transactions. Such transactions are also referred to as Article 9 (or Article IX) transactions.

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17.1 Creating a Secured Transaction Article 9 transactions involve three parties: a creditor, a debtor, and a security interest in collateral. Collateral is the personal property used to secure the debt; a security interest refers to the "rights" that a creditor has in the debtor's collateral so that if the debtor defaults, the creditor can sell the property and recoup some of its losses.

In order for a creditor to obtain an Article 9 security interest in the property of a debtor, three conditions must be met:

1. The creditor has to "give value" to the debtor. Usually this means that the creditor makes a loan of money;

2. The debtor must have "rights in the collateral," meaning that the debtor has ownership in the property he or she is using as the collateral; and

3. The creditor must either take physical possession of the collateral or �ile a security agreement so that others can "see" that the creditor has rights in this particular collateral.

The Note

The note represents the debt between the creditor and the debtor. While it does not have to be as formal as a negotiable promissory note (see Chapter 12 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec12.2#sec12.2) ), it does need to evidence the debt between the parties. Thus, when the debtor signs the note as the maker, the debtor is promising to pay on the debt. In exchange, the creditor gives the debtor value, perhaps a car, boat, house, or loan of cash. Value that a debtor receives in exchange for the security interest is usually the extension of credit or the sale of goods to which the security interest attaches. See Figure 17.1 for a diagram of the debtor–creditor relationship.

Note, however, that the value need not relate to the transaction involving the personal property involved in the security interest, as in the following example.

Dawn Debtor is in default on an unsecured loan for her business's ice cream–making equipment because she missed several monthly payments. She could still offer a security interest in her tangible or intangible personal property (in this case, the title to her various time shares) to her creditors in exchange for the creditor altering the terms of the loan or granting an extension of time to pay it. If they accepted her offer, she would receive "value" for the security interest given to the creditor: the avoidance of a default judgment and the closing of her previously successful ice cream business.

Figure 17.1: Relationship of creditor and debtor in secured and unsecured loans

The requirement that a debtor have rights in the collateral means that debtors may give a security interest only in property that they own or otherwise have the right to possess, and then, only to the extent of their ownership or possessory interest in the property.

The Security Agreement

The security agreement is a written document, formal or informal, that sets out the understanding between the parties regarding the loan and the creditor's rights in the collateral that is securing the loan. If the creditor gives value (e.g., loans the money), and the debtor owns the collateral in which he or she is giving a security interest, then a secured transaction has taken place. Although it is important that the security agreement identify the debt, the agreement does not need to go into detail about the terms of the debt or even repayment. As between the creditor and the debtor only, if the debtor defaults on the loan, then the creditor gains the right to the property.

Finally, creditors may obtain a security interest only in property that is in their possession. This means that a debtor has either turned the property over to their custody or has provided a description of the property, if it is not in the creditor's possession. Thus, a debtor may enter into a valid oral security agreement only if he or she turns the property over to the creditor. If the debtor retains the property or otherwise leaves it out of the creditor's control,

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then the security interest will not arise unless the debtor has authenticated the agreement. The debtor can do so by providing a description of the personal property either in a signed writing or in an electronic form. The electronic version needs to be authenticated by a unique symbol, encryption, or similar process used to identify the person in an e-mail or other form of electronic communication, such as a telephone message or a mouse click. In short, the authentication requirement is very broad: It can include many types of actions but does not require a signature.

Up to this point, the creditor may have loaned money, the debtor has given collateral to secure that loan, and the parties have entered into a written security agreement to memorialize their transaction. It cannot be emphasized enough that while this is indeed a secured transaction, it is only secure as far as the one creditor is concerned. Unfortunately, in many instances, multiple creditors claim an interest in the same collateral. So one must deal with the issue of perfection, or perfecting a security interest, as we will see in the next section.

The Financing Statement

To complicate matters considerably, often competing creditors are vying for the same piece of collateral. Suppose, for example, that you went to purchase an automobile and you �inanced the purchase through the dealer. The dealer would have a security interest in the car. Now suppose that, in need of money, you borrowed from a friend Jake and gave him a security interest in the same car. In the event that you defaulted on your loan from Jake, two creditors would claim an interest in the same collateral. The question is: Who would prevail? The car dealer or the friend? The answer has to do with perfecting a security interest. Perfection involves a next step after creating the security interest. In it, another form is �illed out and �iled called a �inancing statement, more commonly called a UCC-1 form.

There is no way to perfect a security interest other than by �iling the UCC-1. Filing a security agreement, for example, does not lead to perfection. In short, perfection is the legal process by which creditors with a security interest in personal property protect themselves against claims from other creditors who may also have a security interest in the same property. If a creditor follows the prescribed process and perfects the security interest, that person will have an advantage. His or her right to use the property covered by the security interest to satisfy the debtor's debt (in the event of a default) will be superior to that of other creditors with a similar security interest in the property. In addition, perfecting a security interest is intended to give third parties notice of the secured party's security interest, typically with the local property of�ice and the secretary of state.

The �inancing statement must contain a statement describing the collateral it covers. If the secured interest relates to �ixtures (goods permanently attached to realty), the �inancing statement must be �iled in the state of�ice where mortgages on real estate are �iled and must include a description of the real estate to which the �ixtures are attached.

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17.2 Other Secured Transaction Issues In the previous sections we established the basics of what constitutes a secured transaction: the note, the security agreement, and the �inancing statement. In this section, we will examine other concepts that have to do with Article 9 transactions, including further discussion of the concept of perfection.

Purchase Money Security Interests

For some types of personal property, the security interest is perfected automatically without requiring the secured party to �ile a �inancing statement. One type that is commonly used in business is the purchase money security interest in consumer goods. This is a transaction involving consumer credit where the seller extends credit to the consumer for goods sold and retains a security interest in the goods. For example, if a buyer goes to an automobile dealer and purchases a car on credit, the buyer will sign a note to the seller; the buyer, in turn, will receive the automobile and title to the automobile, even though he or she has not paid any money yet; the seller will �ile a �inancing statement evidencing that he or she has a lien on the car that will be re�lected on the title. This is a secured transaction because if the buyer defaults, the seller can reclaim the car. The seller gave value and the buyer gave collateral in which he or she had "rights," in this case, ownership. The seller would probably �ile a �inancing statement (UCC-1) to evidence his or her rights in the collateral; however, since this is a purchase money security interest, the seller has an automatic perfection. Filing is always preferred, however, as it ensures protection against the debtor as well as other parties who are claiming the same collateral.

Duration of Perfection

A �inancing statement is generally effective for �ive years after the date of �iling (UCC § 9-515(a)). However, a continuation statement may be �iled before the �inancing statement on �ile lapses. For a continuation statement to be effective, it must be �iled within six months of the �inancing statement's lapse (e.g., within the last six months of its effective period) and will extend the effectiveness of the security interest for another �ive years from the date when it would otherwise lapse. Continuations may be �iled in succession, effectively extending the coverage of the perfected security interest every �ive years ad in�initum.

Priorities Among Conflicting Security Interests in the Same Collateral

Generally speaking, "�irst in time is �irst in right" when it comes to con�licting perfected security interests. That is, interests are enforced according to their time of �iling or perfection. Further, perfected security interests take priority over unperfected security interests. However, there are exceptions to the general rule. One of these covers perfected purchase money security interests of noninventory purchases of goods. This exception gives preference to these interests over other previously perfected security interests if the purchase money security interest is perfected within 20 days of the debtor taking possession of the collateral (UCC §9-324(a)). Consider the following examples:

Betty Businesswoman gives a general security interest in all present and future business property to Candice Creditor in exchange for a loan. Betty then purchases new �ixtures for her business from Frank's Fixtures, giving Frank a purchase money security interest in the �ixtures. Thus, Frank's security interest will take priority over Candice's even though hers was perfected �irst.

When a perfected purchase money security interest in goods that qualify as inventory is involved, such a security interest takes priority over other security interests in the same inventory.

Barb Businesswoman has given Ben Banker a security interest in her inventory to secure a line of credit. She then places an order for goods for resale in her store from Sandra Seller, secured by a purchase money security interest. Even though it took place later, Sandra's interest in the goods will take priority over Ben's.

Default

Article 9 of the UCC does not de�ine what constitutes a default, but it does allow the parties to de�ine for themselves what constitutes default by mutual agreement (in any manner that is reasonable). When a default occurs, the secured party has several options: to "reduce the claim to judgment" (e.g., sue for default of the underlying note or draft), foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure. Consider the following scenarios:

If the collateral consists of documents, the secured party may proceed either as to the documents or as to the goods they cover. For example, if the collateral is a warehouse receipt for goods in the hands of a third party, and the debtor defaults on the debt, the secured party could either

Transfer the negotiable instrument and use the proceeds to settle the debt; or

Use the warehouse receipt to take possession of the goods it covers and then sell the goods themselves to satisfy the debt.

If the personal property that is the subject of the security interest is insuf�icient to cover the full debt, the secured party can obtain a de�iciency judgment against the debtor for the difference.

If the security interest involves property worth more than the debtor's debt, the debtor is generally entitled to a return of any excess proceeds from the sale or other disposition of the property offset by the reasonable costs related to caring for or disposing of the property.

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Key Terms

Click on each key term to see the de�inition.

Article 9 of the UCC (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The section of the Uniform Commercial Code that governs secured transactions.

Article 9 transactions (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Another name for secured transactions, governed by Article 9 of the UCC.

authentication (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Providing a description of the debtor's personal property either in a signed writing or in an electronic form (by a unique symbol, encryption, or similar process) to complete a security agreement with the creditor.

continuation statement (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A document that can be �iled within six months before a �inancing statement's expiration to extend the latter an additional �ive years.

�inancing statement (UCC-1 form) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

More commonly called a UCC-1 form, a record or records composed of an initial �inancing statement and any �iled record relating to the initial �inancing statement (UCC §9-102(a)(39)); the third step in creating a secured transaction.

�ixtures (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Goods that have become so related to particular real property that an interest in them arises under real property law (e.g., they become part of the real estate by being permanently af�ixed to it) (UCC §9-102(a)(41)).

foreclose (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Action taken by a creditor who seeks to enforce the terms of a mortgage by taking possession of a debtor's home and selling it in order to pay the balance of the debt owed.

note (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A document that represents the debt between the creditor and the debtor; the �irst step in creating a security agreement.

perfected security interest or perfection (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A security interest in personal property that is protected against other creditors who claim the same collateral. Perfection is obtained by �iling a �inancing statement or being in physical possession of the collateral.

purchase money security interests (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Transactions involving consumer credit where the seller extends credit to the consumer for goods sold and retains a security interest in the goods.

rights in the collateral (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Requirement of a secured transaction that debtors may give a security interest only in property that they own or otherwise have the right to possess, and only to the extent of their ownership or interest in the property.

secured party (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

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Any creditor who has a security interest in the debtor's collateral, including a person who holds an agricultural lien, a consignor, or the purchaser of chattel paper, payment intangibles, or promissory notes (UCC §9-102(a)(72)).

security agreement (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An agreement that creates or provides for a security interest (UCC §9-102(a)(73)).

security interest (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The rights a creditor has in the debtor's collateral; if the debtor defaults, the creditor can sell the property and recoup some of its losses.

signature loan (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An unsecured personal bank loan without collateral to guarantee payment.

value (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

In a secured transaction, what the debtor receives from the creditor in exchange for the promise to pay on the debt, e.g., a car, boat, house, or loan of cash; also could be an intangible bene�it, e.g., the avoidance of a default judgment.

Chapter 17 Flashcards

Critical Thinking and Discussion Questions

1. What types of property are covered by Article 9 of the UCC?

2. In order for a creditor to obtain a security interest in the property of a debtor, what three conditions must exist?

3. What is the purpose of perfecting a security interest, and how is it generally accomplished?

4. Your supervisor asks you to �ile a UCC-1 on a piece of collateral. Find a UCC-1 form online and then determine where (in your location as a student) the form would be properly �iled.

5. Why do you think the UCC set up a system that allows creditors to obtain a security interest in a debtor's collateral? Suppose such a system did not exist. What would be the rami�ications of no system in existence to allow for secured transactions?

6. How is it possible that more than one creditor has a claim in the same collateral as other creditors? Can you think of any ways to prevent this from happening?

7. Harry Homeowner needs to buy a new boiler for his home to upgrade his heating system. The total cost would be $7,500, which includes $5,000 for the cost of a new high-ef�iciency furnace and $2,500 for labor, transportation, and taxes. He wants to purchase the unit on credit from Penelope, a licensed HVAC contractor, who is willing to �inance the purchase and installation in exchange for a security interest in the boiler for $7,500. a. A month after the boiler is installed, Harry loses his job and is unable to make the second monthly payment to Penelope. If he offers to give a security interest to Penelope in his entire art collection (worth $100,000) in exchange for Penelope giving him a three-month grace period on making further payments on the boiler and Penelope accepts, may she perfect a security interest in the artwork as well as in the boiler?

The section of the Uniform Commercial Code that governs secured transactions.

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b. Assuming that the security interest in the artwork may be given by Harry to Penelope, what must Penelope do to perfect her interest in the artwork?

c. If Harry fails to make payments after the grace period ends because he has been unable to �ind another job, what are Penelope's legal options?

8. Bernard wants to buy a 50-inch plasma high-de�inition television from his local appliance store. The store, which caters to low-income clientele and offers electronics and other household goods at highly in�lated prices and at the highest interest rate that the law allows in his state, agrees to sell the set to him at a price of $5,000 �inanced over a six-year period at a 25% rate of interest. The �inancing agreement makes it clear that the store retains a purchase money security interest in the television set. As part of the deal, Bernard also executes a second security agreement covering his $5,000 synthesizer (he is a professional musician) and a $2,000 diamond ring that he inherited from his dad. He turns the ring over to the appliance store as security in a verbal agreement, but it is agreed that he will be allowed to keep the synthesizer as long as he makes timely payments, and he provides a written, signed copy of an agreement to this effect to the appliance store. The store promptly perfects its interest in the synthesizer by forwarding a �inancing statement to his state's secretary of state with the appropriate fee and in the form required by local law but does not send �inancing statements covering the television set or ring to the secretary of state.

Two years later, Bernard stops making payments on the television set because he realizes that he made a bad bargain when agreeing to buy the set. a. Has the store perfected its security interest with regard to the ring under the facts given?

b. May the store enforce the security agreement against the synthesizer if the outstanding loan amount at the time of Bernard's default is $4,000 and the actual value of the television set at the time is $500?

c. If the value of the synthesizer at the time of the debtor's default is $3,000 and the market value of the television set is $500, what are the creditor's rights with regard to the secured property? Discuss fully.

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Chapter 18

Bankruptcy Under early common law in Great Britain, individuals who were unable to pay their debts were subject to incarceration in debtor's prisons until they (or their family and friends) paid their debts. While this practice punished irresponsible individuals, it also caused much hardship to the innocent families of delinquent debtors. They would often be left with no means of support when the primary breadwinner was jailed and denied the ability to make a living. Eventually, therefore, this practice was abandoned and was replaced by bankruptcy laws.

In the United States, Article I, Section 8 of the U.S. Constitution gives Congress the power to create uniform laws regulating bankruptcy. Today, bankruptcy law in the United States is codi�ied in the U.S. Bankruptcy Code (Title 11 of the U.S. Code) and was most recently amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA, the Bankruptcy Act). The Bankruptcy Act is divided into "chapters" that have numbers to indicate their applicability. For example, Chapter 7 deals with straight bankruptcy or liquidation, which involves the discharge of a debtor's debts to pay off creditors; Chapter 11 concerns itself not with the liquidation or forgiveness of debt but rather its reorganization or restructuring in order to allow the debtor to continue in business; and Chapter 13 involves the adjustment of debt, similar to Chapter 11 reorganization but available only to individual debtors with regular income.

In this chapter, we will survey the essential provisions of Chapters 7, 11, and 13 and see how the Code provides relief to both creditors and debtors under each of these different types of bankruptcy. Table 18.1 provides a summary of the chapters.

Table 18.1: Types of bankruptcy available under BAPCPA

Chapter 7 Chapter 11 Chapter 13

Commonly called

Straight bankruptcy or liquidation; "fresh start"

Reorganization or restructuring Adjustment of debt

Applies to Individuals or businesses Individuals or businesses Only individuals with a steady income stream

How it works All the debtor's assets are sold by the trustee to pay off the creditors

Debtor works with a committee to reorganize the business and pay off debts

Individual reorganizes payments to creditors

Who brings the proceeding

Either debtor or creditors Either debtor or creditors Debtor only

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18.1 Chapter 7 Liquidation A Chapter 7 liquidation proceeding is often referred to as a "fresh start." One reason is that it allows individuals and businesses who are unable to meet their �inancial obligations to have their debts discharged. Discharged is an essential term in bankruptcy. It means that the debtor no longer has any legal obligation to pay the debt. The ultimate goal of Chapter 7 bankruptcy proceedings, then, is to be discharged from all of one's debts. Chapter 7 begins by turning over substantially all the debtor's property to a trustee with the oversight of the bankruptcy court in order that it may be sold for the bene�it of the debtor's creditors. Suppose the debtor refuses to �ile for bankruptcy or to pay off debts? In that case, a measure of protection is also afforded to the debtor's creditors, who may force liquidation proceedings under certain circumstances when a debtor is unable or unwilling to repay his or her debts.

Who May Bring Chapter 7 Proceedings?

Chapter 7 applies to all debtors, whether an individual, partnership, corporation, or other business entity. There is no requirement that the debtor be insolvent. Insolvency means that the debtor is unable to pay his or her debts as they become due. Nor is there a minimum amount of debt required to voluntarily �ile, although it is highly unlikely that anyone would go to the trouble of �iling for bankruptcy unless he or she had serious �inancial problems. Liquidation proceedings under Chapter 7 may be brought by the debtor (voluntary liquidation) or by the debtor's creditors (involuntary liquidation). In order for creditors to force liquidation on a debtor, the debtor must have a minimum combined unsecured debt of $12,300. If the total number of creditors is 12 or more, three creditors to whom the debtor owes an undisputed, combined, unsecured claim of at least $12,300 must join in the petition for involuntary liquidation. If there are fewer than 12 creditors with an aggregate debt of at least $12,300 in unsecured debt, then any one or more creditors may �ile a petition. Consider the following example.

Adam owes Betty $2,300, Carla $10,000, and Don $12,300. If the debt to the three creditors is unsecured (e.g., not backed by a security interest such as a mortgage on real property or a lien on personal property), and Adam is unable to pay his debts when they become due to all three creditors, Betty and Carla can force Adam into Chapter 7 bankruptcy (or Chapter 11 reorganization), since their combined debts are at least $12,300. Don alone could also force Adam into Chapter 7 or Chapter 11 involuntary bankruptcy or reorganization, since Adam's debt to him meets the minimum amount for an involuntary petition.

Becoming a Debtor in Bankruptcy Court

To initiate a voluntary Chapter 7 bankruptcy proceeding, the debtor must �ile a petition with the bankruptcy court that includes a schedule of assets and liabilities, a statement of current income and expenditures, and a statement of �inancial affairs. To give you an idea of the cost of such a proceeding, the court charges $245 to �ile for Chapter 7 bankruptcy, a $46 administrative fee, and a $15 trustee surcharge. One of the ironies of bankruptcy law is that many people do not have the money to �ile and thus cannot avail themselves of the bene�its of having their debts discharged.

In the paperwork the debtor �iles, he or she must list all creditors and what is owed to each of them. This paper is called the schedule of creditors and is very important for the following reasons:

1) It is the list that the trustee will use to notify creditors of the bankruptcy proceeding. If a creditor is not on the list, it will not receive notice; and

2) The debtor is discharged only from those debts appearing on the list. If the debtor does not report a debt and its corresponding creditor, that creditor will "survive" the bankruptcy. This means that this particular debt was not discharged and the debtor still owes the creditor, thus defeating the very purpose for which the debtor sought relief in bankruptcy court. Therefore, it is to the debtor's bene�it to list every single debt and creditor.

By law, some debts are not discharged in bankruptcy. These include student loans. This means that even if a debtor listed a student loan on the schedule of creditors, the loan would nevertheless survive the discharge and the debtor would have to continue paying. The only exception is in cases of undue hardship. To prove undue hardship, the debtor must �ile a petition to request a bankruptcy court hearing to determine whether not discharging the debt would be an undue hardship. An example of undue hardship would be a 60-year-old with college debts of $50,000 who is working for minimum wage. Such a person has reached his or her peak earning potential, and thus, this large a debt could be deemed an undue hardship.

Becoming a Creditor in Bankruptcy Court

Once creditors have been noti�ied of the bankruptcy, they must �ile a form called a Proof of Claim to maintain any rights against the property. Failure to �ile will result in that creditor being discharged without ever going to court or taking part in the proceedings. This makes sense if the debtor has no money and the creditor decides that nothing will be gained by appearing.

Once the time period for creditors to �ile their Proof of Claim passes, the trustee contacts all the creditors who have �iled so that they can come to court for a meeting of creditors. This usually takes place in the courtroom, where the debtor is put under oath and takes the witness stand. As a businessperson, you may be called to take part in one of these proceedings. The creditors can ask the debtor questions about the whereabouts of any assets and the likelihood of payment. This proceeding often becomes quite heated, as the creditors look around the room and realize that there are perhaps hundreds of other creditors all vying for the defendant's assets. It is interesting to note that the majority of Chapter 7 bankruptcy proceedings involve assets that are exempt or subject to valid liens (by secured creditors), thus leaving nothing for unsecured creditors to recover. In short, for many creditors, there is little likelihood of payment.

Appointing an Interim Trustee

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After a voluntary or involuntary petition for relief is �iled with the bankruptcy court, the court will issue an Order for Relief. As a businessperson attempting to collect a debt, this paper effectively shuts down the ability to collect on the debt. Instead, it gives the debtor "time off" from having to pay, which is why it is also called a stay. During the stay, the bankruptcy court appoints an interim trustee whose responsibility it is to collect the nonexempt property of the debtor. The idea behind collecting all the debtor's property, of course, is that the debtor cannot dispose of it or hide it, and that it can be sold and the proceeds used to pay the creditors on a prorated basis. The stay continues in effect until the �inal adjudication (decision) by the court.

Debtors facing the loss of property in a bankruptcy proceeding may be tempted to hide or dispose of property so that it is not taken by the court to pay off creditors. The general rule is that an impermissible, fraudulent transfer is one in which "the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred . . . or has permitted to be transferred . . . property of the debtor, within one year before the date of the �iling of the petition" (11 U.S.C. § 727(a)(2)(A)). Some of the indicia of a fraud include transferring property either without payment or to a family member or close associate.

Bankruptcy Decrees

At the time the petition for bankruptcy is �iled with the court, an automatic stay goes into effect, and creditors must cease trying to collect from the debtor. The stay remains in effect until the �inal decree is entered, which on average takes four to six months. If it is found that the debtor is both insolvent and has ful�illed his or her obligations under the Code, such as the disclosing and turning over to the trustee all nonexempt property, the court enters a bankruptcy decree, or �inal decision. (Most bankruptcies never go to trial.) The �inal decision permanently discharges all of the debtor's outstanding debts and allows creditors to recover what is owed to them. Each creditor will receive a prorated share of the creditor's debt from the proceeds of property, which was turned over to the trustee to sell. Creditors are paid in the following order:

1. Secured creditors, to the extent of their security interest;

2. Allowed unsecured claims for domestic support obligations, e.g., for spousal or child support and the trustee's approved administrative expenses;

3. Administrative expenses of the estate (court costs, attorney's fees, and related expenses);

4. Gap creditors' claims (a gap creditor is someone who became a creditor in the normal course of business after the �iling of the bankruptcy petition but before the court appointed a trustee);

5. Up to $10,000 in unpaid wages, salaries, or commissions earned by employee creditors within 180 days prior to the �iling for bankruptcy or 180 days from the date of the cessation of the debtor's business, whichever occurred �irst; and

6. All other unsecured claims of creditors.

In the event that funds are insuf�icient to pay all the members of a class their full debt, the debt is prorated for the members of the class. For example, suppose that an estate has only $1,000 left when it comes time to pay the holders, and the debtor owed $1,000 to the state in unpaid income taxes and $500 to the local government in unpaid real property taxes (assuming for the moment that both take equal priority). Then, the state would get two-thirds of the remaining sum and the local government one-third: $666.67 to the state and $333.33 to the local government.

In most bankruptcies, the debtors cannot pay off the creditors. Nevertheless, when the bankruptcy is �inal, the debtor is discharged under Chapter 7 as long as that debtor is an individual. (If the debtor is a corporation or a partnership, there is no discharge.) This is a very important concept. Discharged means that all of the debts that were �iled by creditors and considered by the court are now over and done with. There is no further obligation to pay them. Thus, being discharged in bankruptcy is the ultimate goal of a debtor in Chapter 7. On the downside, a judgment of bankruptcy goes on the debtor's credit report for seven years and makes it dif�icult for the debtor to rebuild his or her credit rating.

Debtor's Property Exempt From Attachment

The basic principle behind Chapter 7 is that a debtor turns in to the court whatever nonexempt real and personal property he or she owns to be sold for the bene�it of his or her creditors, and in return has his or her debts forgiven. Forcing a debtor to turn in all of his or her worldly possessions in order to be granted the protection of Chapter 7 might cause a severe hardship for debtors, who would be left penniless and possibly without the means of earning a living—in effect, acting like a debtor's prison without bars. The Bankruptcy Act therefore allows debtors to keep some of their property, as regulated by federal and state law, as a homestead exemption. The property that a bankrupt debtor is allowed to keep, even after �iling, is called exempt property because it is not subject to the Bankruptcy Act. The following list of property exempt from Chapter 7 bankruptcy liquidation derives from 11 U.S.C. § 522(d) (1–12):

Homestead:

522(d)(1)(5): Real property, including mobile homes and co-ops, or burial plots up to $21,625; unused portion of homestead, up to $10,825, may be used for other property;

522(d)(2): Motor vehicle up to $3,450;

522(d)(3): Animals, crops, clothing, appliances and furnishings, books, household goods, and musical instruments up to $550 per item, and up to $11,525 total;

522(d)(11)(D): Personal injury recovery up to $21,625, except for pain and suffering or for pecuniary loss;

522(b)(3)(C): Tax-exempt retirement accounts, including 401(k)s, 403(b)s, pro�it-sharing, and money purchase plans;

522(d)(10)(A): Public assistance, Social Security, veteran's bene�its, and unemployment compensation;

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522(d)(6): Implements, books, and tools of trade, up to $2,175;

522(d)(10)(D): Alimony and child support needed for support;

522(d)(7): Unmatured life insurance policy except credit insurance;

522(d)(8): Life insurance policy with loan value up to $11,525;

522(d)(10)(C): Disability, unemployment, or illness bene�its; and

522(d)(11)(C): Life insurance payments for a person you depended on, which you need for support.

Note that the dollar amounts above, along with dollar amounts in other key sections of the Code, are adjusted by April 1 every three years by the Judicial Conference of the United States based on the Consumer Price Index. The new rates, rounded to the nearest $25, have been published in the Federal Register by March 1 every three years starting in 1998 and can be viewed here (https://www.federalregister.gov/articles/2010/02/25/2010-3807/revision-of-certain- dollar-amounts-in-the-bankruptcy-code-prescribed-under-section-104a-of-the-code) .

Recall that the Bankruptcy Act is federal law. States also have their own bankruptcy rules. As a result, states can provide different exemptions or de�initions of exempt and nonexempt property to debtors if they choose to do so that can be more or less generous than the federal exemptions. As of this writing, 16 states (including the District of Columbia) allow �ilers to choose between the state exemption and the federal exemption, while 35 states have passed legislation restricting �ilers to the state exemptions only.

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18.2 Chapter 11 Reorganization Unlike Chapter 7 liquidation, which allows for the forgiveness of debt, Chapter 11 restructures the debts under different terms than those originally incurred and formulates a plan for their repayment. A reorganization of debt often involves changing the way a debt is repaid. This could include extending the debt's term in an attempt to provide businesses some needed breathing room to keep them a�loat and prevent Chapter 7 liquidation.

Who May Bring a Chapter 11 Proceeding?

Any person who quali�ies for Chapter 7 protection may also �ile under Chapter 11, except for stockbrokers and commodity brokers, who are speci�ically excluded. The paperwork is extensive, as the debtor must �ile numerous documents with the court:

1. Schedules of assets and liabilities;

2. Schedule of current income and expenditures;

3. Schedule of executory contracts (contracts to be performed in the future) and unexpired leases; and

4. Statement of �inancial affairs.

The cost to �ile a Chapter 11 bankruptcy is $1,000 in addition to administrative fees.

Once the debtor �iles the petition, he or she becomes what is called a debtor in possession, meaning in charge of his or her own assets while the reorganization is being processed. The debtor in possession of a Chapter 11 bankruptcy performs many of the same functions as a bankruptcy trustee in other types of bankruptcy. The debtor in possession is monitored by a U.S. Trustee, who makes sure that regular reports are made to the court and holds a meeting of the creditors.

Appointing a Committee of Creditors

After the court enters an Order for Relief, the U.S. Trustee appoints a committee of creditors, which holds unsecured claims against the debtor. The trustee may also appoint other committees of creditors if he or she deems it appropriate (such as when there are many creditors with different classes of claims). In addition, the court can order the trustee to appoint additional committees at the request of any party in interest. According to 11 U.S.C. § 1102(b)(1), this committee "shall ordinarily consist of the persons, willing to serve, that hold the seven largest claims against the debtor of the kinds represented on such [a] committee."

This committee (or committees) serves as the primary negotiating body in formulating the reorganization plan. The committee has two main roles:

1. Consulting with the debtor in possession about how he or she is operating his or her business and what plans he or she has for paying off the debts; and

2. Helping to formulate a plan to pay off the debts.

The committee of creditors has broad powers to investigate the debtor and to study the feasibility of a reorganization plan. If such a plan is deemed feasible by the creditors, the committee is then primarily responsible for coming up with and submitting a speci�ic plan of reorganization for the debtor.

Appointing a Trustee or Examiner

After the case is started, but before the court approves a �inal reorganization plan, a trustee or examiner is appointed. The court can appoint a trustee either for cause, if it believes that current management has acted with fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor (before or after the case commenced), or simply if it believes such an appointment to be in the best interests of the creditors. If a trustee is not appointed and the debtor is allowed to continue managing the business, then any interested party may request the appointment of an examiner to investigate any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or by current or former management of the debtor; this is also possible if the court believes the appointment of an examiner will be in the interest of any interested party or if the debtor's unsecured debts exceed $5 million.

Duties of Trustees and Examiners

If a trustee is appointed, he or she is given the following duties:

1. Account for all property received;

2. Examine proofs of claims of creditors and object to any that are deemed improper;

3. Furnish information about the estate and estate administration at the request of any party in interest;

4. Furnish information to the court, to the U.S. Trustee, and to any interested government agencies entitled to collect taxes, periodic reports, and summaries about the operation of the debtor's business, including information about business receipts and disbursements;

5. Make a �inal report and a �inal account of the administration of the estate to the court and to the U.S. Trustee;

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6. Provide notice to any party entitled to receive domestic support from the debtor about the discharge and notice that it does not extinguish the domestic support obligations of the debtor;

7. Continue to perform the obligations of a debtor who served as an administrator of an employee bene�it plan at the time of the �iling of the Chapter 11 petition;

8. Use all reasonable best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that provides similar services with a reasonable quality of care in the vicinity of the closing health care facility;

9. File a list of the debtor's creditors; a schedule of the debtor's current assets, liabilities, income, and expenses; and a �inancial statement (if the debtor has not already done so);

10. Investigate the acts, conduct, assets, liabilities, and �inancial condition of the debtor, the operation of the debtor's business, the desirability of the continuance of the business, and any other matter relevant to the case or to the formulation of a plan;

11. Report the results of his or her investigation to the court and to creditors' committees, equity security holders' committees, indenture trustees, and any other entity the court designates;

12. File a plan or report why a plan cannot be formulated, recommend conversion to liquidation (Chapter 7) or to an individual repayment plan case (Chapter 13), or recommend dismissal. (If the trustee formulates a plan or reorganization, he or she will do so in consultation with the debtors.) (11 U.S.C. § 1106(a)(1–8))

If an examiner is appointed instead of a trustee, the examiner has the following duties:

1. Investigate the acts, conduct, assets, liabilities, and �inancial condition of the debtor; the operation of the debtor's business and the desirability of the continuance of the business; and any other matter relevant to the case or to the formulation of a plan; and

2. Report the results of his or her investigation to the court and to creditors' committees, equity security holders' committees, indenture trustees, and any other entity the court designates. (11 U.S.C. § 1106(b)).

Filing of Reorganization Plan

As is true of liquidation, reorganization may be voluntary or involuntary. A Chapter 11 case may be begun voluntarily by a debtor �iling a plan of reorganization at any time (even after an involuntary case has begun). The debtor is given an exclusive right to �ile a plan within the �irst 120 days from the court's Order for Relief granted upon the proper �iling of a case under this chapter. Other interested parties may also propose a plan under certain circumstances: if a trustee has been appointed, if the debtor does not meet the 120-day deadline, or if the debtor meets the 120-day deadline but fails to obtain approval of the plan by the creditors within 180 days of the court's Order for Relief. The court may extend or reduce these time periods, however, for cause, meaning a very good reason. A court may extend the 120-day deadline to a maximum of 18 months and the 180-day deadline for up to 20 months from the date that it grants the Order for Relief.

Acceptance and Confirmation of Reorganization Plan

Before it becomes effective, a reorganization plan must be accepted by the members of each class of debtors that the plan will affect. For a class of creditors to accept the plan, not less than half of the members of a class who together hold a minimum of two-thirds of the total amount of debt for the entire class must vote to accept the plan.

After a reorganization plan is accepted, it must be con�irmed by the court. A plan will be con�irmed by the court only if it is found to meet minimum criteria:

1. The plan complies with the applicable provisions of Chapter 11;

2. The proponent of the plan complies with all applicable provisions of Chapter 11;

3. The plan has been proposed in good faith;

4. All costs and expenses under the plan are approved by the court as reasonable;

5. The identities and af�iliations of any individuals who will serve as a director, of�icer, or voting trustee of the debtor serve as successors to the debtor under the plan or participate in any joint plan with the debtor;

6. The identities and compensation of any insiders that will be retained under the reorganization plan by the debtor are disclosed;

7. Debtors in each class have either accepted the plan or will be guaranteed a minimum claim under the reorganization as they would have received under Chapter 7 liquidation; and

8. Con�irmation of the plan is not likely to be followed by liquidation or further �inancial reorganization in the future.

Effect of Reorganization Plan's Confirmation

Once a plan is con�irmed, the debtor and all creditors are bound by its terms. Debts of the debtor that arose before the �iling for Chapter 11 reorganization are excused after all required payments under the plan are made, except as speci�ically provided for in the reorganization plan or under the provisions of the Bankruptcy Act (e.g., some tax liability is not dischargeable for corporate debtors under Chapter 11). Unlike in Chapter 7 proceedings, the debtor in

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Chapter 11 proceedings retains ownership of his or her property and may continue in business under the speci�ic guidelines of the reorganization plan. In the event that the debtor is uncooperative, the court may simply dismiss the case.

A Closer Look: Chapter 11 for an Illegal Business

Courts may face a number of unusual situations when dealing with Chapter 11 proceedings. For example, what happens when a court is asked to reorganize a business with an illegal purpose? Read this Wall Street Journal article from June 13, 2012 here (http://blogs.wsj.com/bankruptcy/2012/06/13/judge-puts-out-marijuana-grower%E2%80%99s-chapter-11-case/) , about a medical marijuana grower's Chapter 11 bankruptcy case and then consider the questions that follow:

Questions to Consider

1. What type of bankruptcy were the debtors in this case seeking and why?

2. What was the problem faced by the court in assisting with the reorganization of this company?

3. If you had been the judge in this case, how would you have decided? Why?

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18.3 Chapter 13 Adjustment of Debts of an Individual With Regular Income

The next bankruptcy chapter concerns individuals who choose not to �ile under Chapter 7 and lose their property but who instead wish to have a reorganization similar to a Chapter 11 proceeding. This is called Chapter 13, which allows an individual with regular income to �ile a plan with the court for the adjustment of debt. If the plan is approved, the individual's debts will be forgiven if he or she honors the repayment plan approved by the court.

Who May Bring Chapter 13 Proceedings?

Chapter 13 proceedings may be brought by any individuals (other than stock brokers or commodity brokers) who have a stable income from wages or other reliable sources that would allow them to meet their obligations under a repayment plan. For purposes of this chapter, persons on a �ixed income (those receiving pensions, Social Security, disability, or public assistance) all qualify as persons having a regular income. Such income can be derived from self- employment in a business (provided such income is steady and reliable), but the business entity itself cannot be the subject of the reorganization. (As we have just seen, business reorganization would, of course, be covered by Chapter 11 of the Bankruptcy Code.)

In addition to the requirement of a regular income, the total unsecured debt for an individual (or an individual and a spouse �iling jointly) must be less than $307,675, and the total secured debt must be less than $922,975.

Instituting Chapter 13 Proceedings

Unlike Chapter 7 and Chapter 11 proceedings, which may be instituted voluntarily at the request of the debtor, or involuntarily at the request of the creditors, Chapter 13 proceedings may be brought only voluntarily by the debtor. The rationale for not permitting involuntary Chapter 13 cases is perhaps best expressed in the U.S. Senate's own report on Section 303 of the Bankruptcy Act, which governs the commencement of involuntary cases:

Involuntary Chapter 13 cases are not permitted. . . . To do so would constitute bad policy, because Chapter 13 only works when there is a willing debtor that wants to repay his creditors. Short of involuntary servitude, it is dif�icult to keep a debtor working for his creditors when he does not want to pay them back. (S. Rep. No. 95-989)

Lest it seem unfair to deny creditors the ability to bring an involuntary case under Chapter 13, keep in mind that they can bring either an involuntary Chapter 7 or an involuntary Chapter 11 action. The purpose of Chapter 13 is to make it simpler for debtors who meet the eligibility criteria to come up with a voluntary plan to reorganize their debts without having to jump through all the hoops required of a business by the standard Chapter 11 reorganization.

Filing, Contents, and Confirmation of the Plan

To initiate a Chapter 13 bankruptcy, the debtor must �ile a plan for the adjustment of debts. The debtor's plan must contain the following provisions:

1. The debtor must provide for the submission of all future income (or as much of it as necessary to effectuate the plan) to the trustee;

2. The plan must provide for the deferred payment of all claims entitled to a priority under § 507 of the Bankruptcy Code unless the holders of such claims agree to different treatment;

3. If the plan classi�ies claims, it must provide identical treatment for all claims of a particular class;

4. The plan may provide for less than full payment to a priority claim for support under § 507(a)(1)(B) if the plan provides that all of the projected disposable income of the debtor will be applied to make payments under the plan for �ive years; and

5. The plan may not provide a payment period longer than three years (although the court may extend the period to not more than �ive years if the debtor can show cause).

The court will con�irm the debtor's plan for the repayment of debts if it meets the following criteria:

1. It complies with the provisions of Chapter 13 and other applicable provisions of the Bankruptcy Code;

2. All required fees that must be paid before con�irmation have been paid;

3. The plan has been proposed in good faith by the debtor;

4. The amount payable to each unsecured claim is not less than the amount that would have been paid if the estate of the debtor were liquidated under Chapter 7;

5. The holders of secured claims provided for in the plan have accepted the plan;

6. The debtor will be able to make all payments under the plan and comply with the plan;

7. The debtor's action in �iling the petition was in good faith;

8. The debtor has paid all amounts required to be paid under domestic support obligations; and

9. The debtor has �iled all required federal, state, and local tax returns.

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Payments by the Debtor

Unless a court orders otherwise, a debtor is required to commence making payments within 30 days of �iling the proposed plan or the order for relief, whichever is earlier. Payments are made to the trustee in the amount proposed by the plan. Payments due for leases of personal property are paid directly to the lessor, with evidence of payment sent to the trustee. Payments made to the trustee are held by the trustee until the plan is con�irmed by the court, at which time the trustee is charged with distributing those payments as soon as practicable.

If the plan is con�irmed, the trustee will continue to receive payments as provided for under the plan and distribute these to the debtors in accordance with the provisions of the plan. If the plan is not approved by the court, however, the trustee must return all monies received from the debtor (minus the trustee's allowable fee).

Discharge and Refiling

After the debtor makes the �inal payment under the terms of the plan, the court will issue an order discharging the debtor from all debt covered by the plan. A court may also grant a discharge even before the debtor completes the agreed-upon payments under the plan. The court can do so if it �inds that the debtor's failure to keep making payments is brought about by circumstances for which the debtor should not be held accountable, as long as each creditor has been paid an amount equal to what it would have received under a Chapter 7 liquidation or Chapter 11 reorganization of the debtor's estate.

Debtors whose debts are discharged by a Chapter 7 bankruptcy and subsequently get into additional economic dif�iculties can �ile for Chapter 7 bankruptcy protection again after eight years from the bankruptcy decree and can �ile for Chapter 11 or Chapter 13 reorganization after only six years from a discharge in bankruptcy.

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18.4 Bankruptcy Abuse Prevention and the Consumer Protection Act of 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Pub. L. No. 109-8) went into effect on October 17, 2005. The intent of Congress in passing the act was to address the increase in consumer bankruptcy �ilings that in 1998 had reached the 1 million mark for the �irst time. According to U.S. House of Representatives Judiciary Committee Report 109-031, bankruptcy �ilings doubled in the decade preceding passage of the act and reached 1.6 million �ilings in �iscal year 2004. The act was an attempt by Congress to make bankruptcy �iling a matter of last resort in order to stem the losses for creditors that result from abusive use of bankruptcy �ilings. Such expenses do not vanish into the air but are passed on to all consumers in the form of higher interest rates, higher prices, and higher down payments required for consumer goods and services.

Credit Counseling Requirement

The act makes it harder and more expensive to �ile for bankruptcy in a number of ways. For example, it requires individuals to complete credit counseling with an agency approved by the U.S. Trustee's Of�ice prior to �iling for Chapter 7 or Chapter 13 protection. A second counseling session on personal �inancial management is required at the conclusion of the bankruptcy case before a discharge order is entered.

In the following excerpts from the case In re: Lane (Slip Copy 2012 WL 1865448, Bkrtcy, N.D. Okla. 2012), the failure to follow the credit counseling rules mandated under the BAPCPA resulted in the dismissal of the bankrupt debtor's petition.

Cases to Consider: In re: Lane

In re: Lane, Slip Copy 2012 WL 1865448, Bkrtcy, N.D. Okla. (2012)

Excerpted opinion:

The Court must determine whether Ms. Lane was eligible to be a debtor under Title 11 of the United States Code at the time she �iled her petition, and, if not, whether her post-petition actions operated to make her eligible. While the Court sympathizes with Ms. Lane's situation, it concludes that her case must be dismissed.

Background

On March 16, 2012, Jaclyn S. Lane ("Debtor") �iled a petition for relief under Chapter 7 of the Bankruptcy Code, which was �ile stamped at 8:02 p.m. CDT. As part of her petition, Debtor �iled a form titled Exhibit D, which includes a certi�ied statement, made under penalty of perjury, that she had received a brie�ing from an approved credit counseling agency "[w]ithin the 180 days before the �iling of [her] bankruptcy case," and that she had a certi�icate from the agency that describes the services provided to her.

***

Discussion

In enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") Congress created a new pre-�iling credit counseling requirement for all individual debtors seeking bankruptcy protection. As enacted, (the law) provided that, with certain exceptions an individual could not be a debtor under any chapter of the Bankruptcy Code unless he or she had received an approved brie�ing (commonly referred to as "credit counseling") "during the 180-day period preceding the date of �iling of the petition. . . ." Where none of the statutory exemptions applied, many courts, including this Court, adopted a strict interpretation of the 180-day provision. These courts routinely dismissed cases when debtors were found to be ineligible, whether because the credit counseling was taken outside the 180-day window, was taken from an unapproved source, or was taken post-petition without requesting a waiver and meeting the requirements of (the statute).

***

Section 109 sets forth a fairly straightforward requirement that an individual must receive a brie�ing regarding credit counseling from an approved source during the 180-day period ending on the date of �iling of the petition. Although it appears that Debtor has actually obtained two such brie�ings, neither of them falls within the statutory bounds of § 109(h). Debtor argues that because she got close, both by taking the course too early and too late, the Court should adopt a test that �inds she has met the requirement in spirit. Courts that adopt such tests tend to conclude that the credit counseling requirement is of such little value that its enforcement is completely elective. With all due respect, it is not the role of this Court to question the wisdom of the eligibility requirements found in § 109. Instead, "when the statute's language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms." While the dismissal of this case may cause additional expense and burden to the Debtor if she chooses to �ile again, such an outcome can hardly be considered absurd. In the absence of something akin to abuse of the bankruptcy system, it is not the Court's place to consider waiving such a requirement.

Conclusion

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The Court concludes that even if it has discretion to waive the credit counseling requirement of § 109(h)(1) in some circumstances, such circumstances are not present in this case. In the absence of a valid exemption or other waiver under § 109(h)(2–4), the Court �inds that Debtor is not eligible to be a debtor under Title 11 of the United States Code, and that her case shall be dismissed.

Read the full text of the case here (http://www.leagle.com/xmlResult.aspx?page=1&xmldoc=In%20BCO%2020120522694.xml&docbase=CSLWAR3- 2007-CURR&SizeDisp=7) .

Questions to Consider

1. What does the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) require individuals to do?

2. What did the debtor in this case fail to do?

3. What was the result of that failure?

4. In your opinion, are the requirements under the act a worthy addition to the law or not? Why?

Means Testing

The new rules also require a means test before individuals can �ile for Chapter 7 protection. Individuals who do not pass the means test (whose monthly income over allowed expenses is higher than the act allows) are precluded from �iling for Chapter 7 protection and are limited to a Chapter 13 or Chapter 11 �iling. The valuation of personal property not subject to attachment also changed under the act to re�lect the property's retail market value (what it would cost to purchase the property in its used condition at retail) rather than the old measure of value as what a consumer could sell the property for at an auction. This change raised the valuation of exempt property over that of the old system, making �ilers able to keep less personal property under the allowed exemptions.

State Residency Requirements

Because state exemptions vary widely, especially with regard to the homestead exemption (the equity value on a primary residence that the �iler is allowed to keep), the act sets up limits on the ability of �ilers to shop for a friendlier �iling venue. The time period required for a resident to live in a state prior to being able to claim the state exemptions was increased from three months under the prior law to two years. And residence for 40 months is required prior to being able to claim a given state's homestead exemption. Filers who do not meet these new time limits may use only the exemptions from the state in which they lived during the statutory period prior to the �iling.

Other Restrictions

The new rules give priority to spouses and children of debtors over all unsecured creditors with regard to alimony and child support payments. The rules also require that lawyers who represent bankruptcy �ilers personally attest to the accuracy of the information provided in the bankruptcy �iling. This new requirement subjects the lawyer to potential liability for false or fraudulent information contained in the �iling and effectively forces the attorney to verify the accuracy of critical information provided by the client. This change will signi�icantly increase the workload required for �ilings and, therefore, the cost to clients seeking the protection of the Bankruptcy Act. In addition, the increased personal and professional liability risk to attorneys may result in fewer attorneys willing to practice in the bankruptcy area in the future as well as signi�icantly higher costs to consumers seeking the relief of the bankruptcy courts. Since the enactment of BAPCPA in 2005, the number of consumer �ilings for bankruptcy has decreased; however, few data are available to show whether this is the result of the act's credit counseling or attorney attestation requirements.

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Key Terms

Click on each key term to see the de�inition.

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A federal amendment to the Bankruptcy Code that makes it more dif�icult and expensive to �ile for bankruptcy and requires all debtors to engage in credit counseling.

Bankruptcy Code (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Title 11 of the U.S. Code, which was amended by BAPCPA in 2005.

bankruptcy decree (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A �inal decision in a Chapter 7 bankruptcy entered by the bankruptcy court, permanently discharging all the debtor's outstanding debts and allowing creditors to recover.

Chapter 7 bankruptcy (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of bankruptcy that is also called a "fresh start" because it involves paying off creditors with whatever money or assets are available and being discharged from whatever debts remain.

Chapter 11 bankruptcy (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of bankruptcy that includes reorganization (restructuring) of debt and paying off creditors.

Chapter 13 bankruptcy (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A type of bankruptcy for individuals with stable income that allows them to reorganize their debt according to an agreed-upon plan with creditors and the court.

committee of creditors (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

In a Chapter 11 proceeding, a group of unsecured creditors appointed by the bankruptcy court that consults with the debtor about how debts will be paid off.

con�irmation of a reorganization plan (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The bankruptcy court approval of a Chapter 13 plan submitted by the debtor.

debtor in possession (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

In a Chapter 11 proceeding, a debtor who is allowed to keep his or her assets while the reorganization is being processed.

discharged (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

When the debtor no longer has any legal obligation to pay the debt; the goal of bankruptcy proceedings.

exempt property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Property of the debtor that is not subject to the bankruptcy proceeding and therefore survives the bankruptcy.

fraudulent transfer (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A transfer of property made by the debtor to try to hide the property from the bankruptcy court and creditors.

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gap creditor (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A person who becomes a creditor in the normal course of business after the �iling of the bankruptcy petition but before the appointment of a trustee.

homestead exemption (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The amount of equity value on a primary residence that the �iler is allowed to keep; set by state law.

insolvency (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Inability to pay debts as they become due.

interim trustee (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

During a stay, a bankruptcy court–appointed person whose responsibility it is to collect nonexempt property from the debtor.

involuntary liquidation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

When creditors force a debtor into Chapter 7 bankruptcy, requiring that person to sell off his or her assets.

liquidation (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Process whereby a debtor's assets are sold to pay off creditors.

means test (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Under the BAPCPA, how the debtor must show that his or her monthly income, compared with allowed expenses, is not higher than the act allows and thereby enables Chapter 7 �iling.

meeting of creditors (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Bankruptcy court proceeding in which the defendant answers questions set forth by the creditors.

nonexempt property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Property of the debtor, other than personal residence, that is subject to the bankruptcy proceeding and therefore can be taken from the debtor.

Order for Relief (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A bankruptcy court order that effectively shuts down the ability to collect on the debt, giving the debtor time off from payment; also called a stay.

Proof of Claim (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A form �iled with the bankruptcy court by creditors to verify their claims against the defendant.

reorganization (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A Chapter 11 bankruptcy proceeding in which the debts are restructured through a plan to facilitate repayment.

reorganization plan (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The court- and creditor-approved plan for how the debtor will pay off his or her debts.

restructuring (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

See reorganization.

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schedule of assets and liabilities (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A form �iled with the bankruptcy court that sets forth the debtors' property and debts.

schedule of creditors (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A form �iled with the bankruptcy court that lists the names and addresses of creditors as well as how much money is owed to each.

stay (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A bankruptcy court order that effectively shuts down the ability to collect on the debt, giving the debtor time off from payment; also called an Order for Relief.

U.S. Trustee (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Appointee who makes sure that regular reports are made to the court and holds a meeting of the creditors.

Chapter 18 Flashcards

Critical Thinking and Discussion Questions

1. Which chapter of Title 11 of the U.S. Code deals with liquidation? With reorganization?

2. What is the basic difference between Chapter 7 and Chapter 11?

3. Name four of the duties of a trustee under Chapter 11 reorganization proceedings.

4. What provisions must be contained in a debtor's plan under Chapter 13?

5. Under the federal exemptions listed under the Bankruptcy Act, how much of the equity in a homeowner's primary residence is exempt in a Chapter 7 �iling? Are these exemptions governed by state law as well?

6. Peter Penniless �iled for bankruptcy under Chapter 7. At the time of �iling, his assets subject to attachment totaled $3,000. His debts included the following: $2,500 in allowed administrative expenses in bringing the case; $5,000 to Visa, $4,000 to MasterCard, and $1,000 to American Express in unsecured debt. a. How much of the administrative expense claim will be paid? Explain.

b. How much of the unsecured debt will be paid to the credit card creditors? Explain.

7. Beautiful Homes, Inc., a business providing home decorating services that is wholly owned by Jenny Chang, �inds itself in �inancial dif�iculties. Its assets, including the goodwill of the business, its long-term commercial lease, and its account receivables, total $150,000, but the total debts of the business are $250,000. Although the business is generally healthy, Jenny's problems stem primarily from her having �inanced a recent expansion through short- term, variable-interest loans just before interest rates began to rise. The result is that she can no longer meet the monthly payments on her loans. a. Under the facts given, would Jenny be wise to �ile for Chapter 7 protection of her business? Explain.

b. Should Jenny �ile for Chapter 11 protection of her business? Explain.

A federal amendment to the Bankruptcy Code that makes it more difficult and expensive to file for bankruptcy and requires all debtors to engage in credit counseling.

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c. Could Jenny �ile for Chapter 13 protection of her business enterprise? Explain.

8. Debby Debtor has just been informed that her $75,000 per year middle-management position is being eliminated as part of her company's downsizing. Debby's basic assets include a car worth $20,000, $30,000 equity in her home, $10,000 in CDs, and $2,000 in savings. Her monthly payments on her home, car, credit cards, utilities, and property taxes total $2,500. Her total unsecured debt is $20,000, and her secured debt (primarily her home and auto �inancing) is $300,000. Afraid that she will need many months to �ind another job and that selling her home in the present real estate market in her area would not be feasible, she is considering �iling for protection under the Bankruptcy Act. a. May Debby �ile under Chapter 7? Should she?

b. May she �ile under Chapter 11? Should she?

c. May she �ile under Chapter 13? Explain fully.

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Real Property

Chapter 19

Real and Personal Property The term property is used to describe anything that is capable of ownership. Property is normally divided into two types: real and personal. Real property consists of land and anything permanently attached to it, called �ixtures. Personal property is "all other property" or anything else that is capable of ownership. What distinguishes real from personal property is that real property is �ixed and unmovable, whereas personal property (both tangible and intangible) is movable. The terms personal property, goods, and chattels all refer to the same type of property and are interchangeable.

In general, an ownership right in property, regardless of its nature, gives the owner rights that the government sanctions and protects. For instance, the owner has the right to use the property, sell it, give it away, rent it, possess it, prevent others from possessing or interfering with it, and, with some exceptions, even destroy it. Put another way, ownership of property carries with it the exclusive right to use, possess, and dispose of the thing over which one has an ownership interest. Government sanctions property rights by recognizing the rights of individuals to use their property. It does so exclusively through criminal statutes that make interfering with the property rights of others (e.g., through theft, arson, criminal mischief) a punishable offense, as well as by allowing individuals to use the courts to defend their property rights and to seek civil damages against those who interfere with them (e.g., actions in tort and contract). In this Chapter, we will explore personal and real property rights and how to obtain title to real property.

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19.1 Personal Property Personal property can be divided into both tangible and intangible types. We have already learned about tangible personal property in our discussion of Article 2 of the Uniform Commercial Code, which covers the sale of goods. Intangible personal property, on the other hand, covers ownership rights over things that do not have physical existence, such as intellectual property (copyrights, patents, trademarks, and the like; see Chapter 20 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch20#ch20) ), stocks, bonds, contract rights, and commercial paper (see Unit IV (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/unit04#unit04) ).

Acquiring Title to Personal Property

As you are doubtless aware, nearly everything on earth is capable of ownership. Even at early common law, where all real property and wild animals in England were deemed to belong to the crown (which, in turn, could gift parts of it to favored nobles as it saw �it), serfs were allowed limited rights to own personal property. Among the ways to acquire rights to personal property are by possession, by purchase, and by gift.

By Possession

Title by possession refers to instances such as shooting a wild animal like a deer. The hunter then "owns" the wild animal by virtue of possessing it. Similarly, one can also acquire title to abandoned property, such as property left on the curb, by taking it into possession, thus the adage "�inders, keepers." Possession alone in both instances can result in ownership.

By Purchase

Title by purchase is by far the most common way to acquire rights to personal property. Recall that the purchase of goods is covered by Article 2 of the Uniform Commercial Code (see Chapter 10 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch10#ch10) ). Once property has been delivered and paid for pursuant to a binding agreement for its sale, the item's ownership passes from the seller to the buyer, and the buyer acquires whatever ownership interest the seller had to give. This is true whether a cash, credit, or barter transaction is involved. If an electrician agreed to purchase a painter's painting in exchange for wiring the painter's home, title to the painting would pass as soon as it was turned over to the electrician, subject to the latter keeping up his her end of the bargain and properly wiring the painter's home. The same would be true if the electrician paid $1,000 in cash for the painting, gave a check for $1,000 for it, or charged the painting on a credit card.

When title is acquired through purchase, the purchaser obtains exactly whatever title the seller had to give; thus, if the seller is a thief, the purchaser will generally acquire no title to the goods. The general rule is that a seller passes exactly the title he or she has to the goods being sold. Therefore, since a thief has no title to the goods sold, he or she can pass no title to them.

By Gift

Rights to personal property may also be established through title by gift. This involves the transfer of personal property from the donor, the owner of the property, to the donee, the receiver of the gift. There must be actual delivery of the gift and acceptance of the gift by the donee. Where physical delivery is impossible or impractical, a valid constructive delivery can be made by the donor, who takes some af�irmative step to deliver either the property itself or the means of obtaining the property to the donee. For example, if a donor wishes to make a gift to the donee of a gold watch that is in the donor's safety deposit box in a bank, giving the donee the key to the safety deposit box along with written authorization to the bank to allow the donee to access the safety deposit box would construe a valid constructive delivery of the watch itself. Likewise, giving the keys and signed registration to a car to the donee constitutes constructive delivery by the donor of the automobile, regardless of where the automobile is located at the time that the keys and registration are transferred.

Lost, Misplaced, and Abandoned Property

Personal property that is not in the owner's possession may be lost, misplaced, or abandoned. When such property comes into the possession of a third party, not the owner, issues sometimes arise as to whom in fact has ownership in the property. Table 19.1 characterizes these three types of dispossessed property.

Table 19.1: Dispossessed property

De�inition Who Owns It

Lost Unintentionally placed; owner forgets where it is. Title vests in the original owner.

Misplaced Intentionally placed; owner forgets where it is. Title vests in the original owner. If the original owner never claims the goods, title vests in the premises where left, not in the �inder.

Abandoned Intentionally placed; owner knows where it is. Title vests in the person who �inds it.

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Under common law, the general rule always holds that title to property is in the original owner: the person who originally acquired title to the goods before they were lost or misplaced. In the case of lost property, if the original owner loses the goods, it means that he or she unintentionally placed the goods somewhere. Think of a lost wallet that falls out of a purse and falls onto a street curb. It is obvious to anyone who sees it that it was not intentionally placed there, but somehow got there by accident. Thus, if a stranger picks up the wallet, that person does not acquire title to it but instead has a duty to take it to the police and leave the property in their possession for the statutory period of time, if the �inder wishes to acquire title. Although this time period varies, essentially, the police retain possession of the goods until a certain time has passed and notice of the loss has been published in the newspaper. Then and only then does title to the lost goods vest in the �inder.

Misplaced property is quite different in character because it was intentionally placed. Imagine a busy store on a rainy day and a customer who places his or her umbrella by the counter while looking at something to buy. The customer leaves the store, and the umbrella remains next to the counter until a store employee �inds it that evening. The umbrella was placed there on purpose, but the customer cannot remember where. In this case, the owner of the store has a legal duty to keep the goods reasonably safe. The law imposes this duty with the idea that the customer will return to the store to claim the goods; and, because the store is obligated to keep the goods there, the customer will be reunited with them. Here, a third-party �inder does not acquire any rights to the goods, and if they are never returned to the true owner, title vests in the store.

Abandoned property, on the other hand, comprises goods that the owner has purposefully placed and obviously given up rights to, such as a refrigerator left on a curb with the door taken off. One must be careful, of course, that the goods are truly abandoned, lest the taker be accused of theft.

In Grande v. Jennings, the court considered who owned property found in the walls of a house. Excerpts from the case follow.

Cases to Consider: Grande v. Jennings

Grande v. Jennings, —P.3d.—, 2012, 635 Ariz. Adv. Rep. 19 (May 2012)

This case asks us to resolve who owns the money found in the walls of a Paradise Valley home: the estate of the home's former owner or the couple who owned the home at the time of the discovery. . . . Robert A. Spann lived in his Paradise Valley home until he passed away in 2001. His daughter, Karen Spann Grande, became the personal representative of his estate. She and her sister, Kim Spann, took charge of the house and, among other things, had some repairs made to the home. They also looked for valuables their father may have left or hidden. They knew from experience that he had hidden gold, cash, and other valuables in unusual places in other homes. Over the course of seven years, they found stocks and bonds, as well as hundreds of military-style green ammunition cans hidden throughout the house, some of which contained gold or cash. . . .

The house was sold "as is" to Sarina Jennings and Clinton McCallum ("Jennings/McCallum") in September 2008. They hired Randy Bueghly and his company, Trinidad Builders, Inc., to remodel the dilapidated home. Shortly after the work began, Rafael Cuen, a Trinidad employee, discovered two ammunition cans full of cash in the kitchen wall, went looking, and found two more cash-�illed ammo cans inside the framing of an upstairs bathroom. After Cuen reported the �ind to his boss, Bueghly took the four ammo cans but did not tell the new owners about the �ind, and tried to secret the cans. Cuen, however, eventually told the new owners about the discovery and the police were called. The police ultimately took control of $500,000, which Bueghly had kept in a �loor safe in his home.

Although elementary school children like to say "�inders keepers," the common law generally categorizes found property in one of four ways. Found property can be mislaid, lost, abandoned, or treasure trove. Property is "mislaid" if the owner intentionally places it in a certain place and later forgets about it. "Lost" property includes property the owner unintentionally parts with through either carelessness or neglect. "Abandoned" property has been thrown away, or was voluntarily forsaken by its owner. . . . [citations omitted] Property is considered "treasure trove" if it is veri�iably antiquated and has been "concealed [for] so long as to indicate that the owner is probably dead or unknown."

A �inder's rights depend on how a court classi�ies the found property. Under the common law, "the �inder of lost or abandoned property and treasure trove acquires a right to possess the property against the entire world but the rightful owner regardless of the place of �inding." A �inder of mislaid property, however, must turn the property over to the premises owner, "who has the duty to safeguard the property for the true owner." ("The right of possession of mislaid property belongs to the owner of the premises upon which the property is found, as against all persons other than the true owner.")

Signi�icantly, among the various categories of found property, "only lost property necessarily involves an element of involuntariness." The remaining categories entail intentional and voluntary acts by the rightful owner in depositing property in a place where someone else eventually discovers it. . . . For example, the Iowa Supreme Court has stated that "[m]islaid property is voluntarily put in a certain place by the owner who then overlooks or forgets where the property is," and that one who �inds mislaid property does not necessarily attain any rights to it because possession "belongs to the owner of the premises upon which the property is found," absent a claim by the true owner. In Benjamin (Benjamin v. Lindner Aviation, Inc., 534 N.W.2d 400, 406 (Iowa 1995) (citing Ritz v. Selma United Methodist Church, 467 N.W.2d 266, 269 (Iowa 1991)), the court determined that packets of money found in a sealed panel of a wing during an inspection of a repossessed airplane were mislaid property because the money was intentionally placed there by one of the two prior owners.

Arizona follows the common law. In Strawberry Water Co. v. Paulsen, we stated that in order to abandon personal property, one must voluntarily and intentionally give up a known right. ("Abandonment . . . is the owner's relinquishment of a right with the intention to forsake and desert it.") Abandonment is "a virtual throwing away [of property] without regard as to who may take over or carry on." In fact:

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While personal property of all kinds may be abandoned, the property must be of such a character as to make it clear that it was voluntarily abandoned by the owner. In this connection, it has been said that people do not normally abandon their money; and, accordingly, that found money will not be considered as abandoned, but as lost or mislaid property. [25 Am.Jur.2d Abandonment of Tangible Personal Property §2 (1981)]

Here, it is undisputed that Spann placed the cash in the ammunition cans and then hid those cans in the recesses of the house. He did not, however, tell his daughters where he had hidden the cans before he passed away. His daughters looked for and found many of the ammo cans, but not the last four. In fact, it was not until the wall-mounted toaster oven and bathroom drywall were removed that Cuen found the remaining cash-�illed cans. As a result, and as the trial court found, the funds are, as a matter of law, mislaid funds that belong to the true owner, Spann's estate.

Read the full text of the case here (http://azcourts.gov/Portals/89/opinion�iles/CV/CV110148.pdf) .

Questions to Consider

1. Was the found property lost, misplaced, or abandoned?

2. Does it make any difference in your determination that the property was hidden in the walls?

3. If his employee had not told the sisters about the discovery of the money, this case would have never gone to trial. Under those circumstances, do you think the contractor should be prosecuted for larceny of the $500,000?

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19.2 Real Property Real property can be de�ined as land and anything that is permanently attached to land, including buildings, trees, and growing crops. The owner of real estate owns not only the land itself and anything permanently attached to it, but also everything below the land, including minerals and precious metals, as well as the space above the land up to a height set by local ordinances (typically up to several hundred feet above the highest structure: so-called air rights).

With few exceptions, such as easements (discussed below), the owner of real estate has the right to exclusively use the property and to prevent others from using it without permission. As we've seen in our discussion of criminal law (Chapter 6 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch06#ch06) ) and torts (Chapter 7 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch07#ch07) ), the willful entry into the real estate of another without the owner's consent can constitute trespass, which is both a crime and a tort.

Fixtures

Some property begins its life as personal property and transforms into real property. Whenever personal property is permanently af�ixed to real property, such as in the installation of a ceiling fan or dishwasher, it becomes a �ixture, and its nature changes from personal to real property. Suppose that a homeowner purchased a dishwasher for the home. This particular dishwasher connects to the sink faucet with a hose but is portable—able to roll around on four casters. It is movable, tangible, and classi�iable as personal property. However, if the homeowner took that same dishwasher and installed it into the kitchen cabinets and wired and plumbed it such that pulling it out would leave a hole, that dishwasher would have changed its character from personal property to real property. Fixtures are so attached to real property that they become an integral part of it, and therefore, when the homeowner sells the house (real property), all the �ixtures are sold with it, as they too are real property.

Easements

An easement is a right to use the property of another for a limited purpose. The most common kinds of easements involve the right to travel over the property of another to gain access to one's land, as well as those granting public utilities the right to transport power, water, gas, or phone lines over or under the land in order to provide needed services. When an easement is granted over one piece of land for the bene�it of another, the bene�ited land is called the dominant estate, and the land that is burdened by the easement is called the servient estate. Generally speaking, easements can have perpetual existence or be created to last for a speci�ied period of time. Easements are recorded in the county clerk's of�ice and become part of the land's history so that anyone can see that an easement is attached to the property. Filing the easement gives notice to the world that such a claim exists on the property; thus, when it is sold, the buyer receives the property with the same easements attached to it, or "subject to" the easements. Obviously, if the landowner wants electricity on the property, then an electric easement is bene�icial, but other types of easements can be problematic, such as the grant allowing someone to cross the privately owned land.

Profits à Prendre

A pro�it à prendre is another type of right in real estate that gives its holder the right to go onto the land of another and to remove something from it or to make some use of another's soil. Common pro�its à prendre involve mining rights, logging rights, and water rights in another's land. The characteristic that distinguishes a pro�it à prendre from an easement is that the former involves the right to remove something from the land, whereas the latter merely involves the right to go onto or pass through the land of another for a speci�ic purpose. Because pro�its à prendre confer an interest in real property, they must be created subject to the same formalities as any other real property interest.

Licenses

A license is a revocable, temporary privilege to go on another's land for a speci�ic purpose. Unlike easements and pro�its à prendre, licenses are not considered interests in land. Because they are not interests in real estate, licenses can be created and revoked orally or in writing without any special requirements or formalities. Because a license is revocable at any time by the owner or person in lawful possession of the real property, a person who is on another's land as a licensee must leave as soon as the license expires or is revoked; otherwise, that person becomes a trespasser.

A movie theater is a good example of a license, with the moviegoers being the licensees who must leave when the movie is over and who are subject to termination of the license if they misbehave. If a licensee who has given consideration for his license (e.g., the patron of a movie theater) is asked to leave the premises without cause, he is entitled to a refund under a theory of breach of contract. If a license for which a fee has been paid is revoked for cause, such as for theater patrons talking loudly during the movie, throwing popcorn, talking on a cell phone during a performance, or engaging in other disruptive conduct that interferes with the enjoyment of the movie, then no refund need be made by the grantor of the license since no breach of contract is involved.

Obtaining Title

When you purchase personal property, you are not usually concerned about who has title to the goods. In most situations, a sales receipt is enough proof of ownership. In contrast, when you purchase a car, that is one type of personal property in which ownership is represented by a piece of paper called a title. This piece of paper represents ownership in the car, including the right to sell it to someone else, insure it, leave it in a will, or change its color. Just as no one can purchase a car without receiving a valid title, you cannot purchase real property without receiving a deed. A deed represents the owner's right to occupy, sell, give away, or change the property, just as a car title does. The following section explains in more detail how deeds are created and transferred as well as their legal signi�icance.

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Transfer by Deed

The creation and transfer of an interest in land is almost always accomplished by the execution and delivery of a valid deed to the property from the grantor (the owner/seller) to the grantee (the buyer). When a valid deed is delivered to the grantee, title to the underlying real estate likewise passes; delivery of the deed is the legal equivalent of delivering the land itself.

In order to be valid, a deed must meet the following requirements:

1. Be in writing;

2. List the name or names of the grantor(s) and the grantee(s);

3. Contain words that unequivocally show an intent to transfer land;

4. Offer a clear description of the land being transferred; and

5. Contain the signature(s) of the grantor(s).

As long as these �ive requirements are met, a deed will be valid. Even though most deeds are executed by �illing in the blanks of ready-made forms, in most jurisdictions there is no requirement that a speci�ic form be used, so a handwritten deed would be perfectly valid as long as it ful�illed the �ive requirements.

Warranty Deed

In a warranty deed, the grantor gives assurances to the grantee that he or she has valid title to the land being transferred. The grantor also creates an obligation to make reparations to the grantee or anyone to whom the grantee may subsequently transfer the land if the title is found to be defective. Unless there is some plausible reason, one should never accept title unless it is in the form of a warranty deed. This is because a warranty deed guarantees "good title," that is, that there are no claims against the property that are not fully disclosed.

Quitclaim Deed

Suppose that a piece of property has been bequeathed to generations of a family but the descriptions in the deed changed over the years. The heirs to that property would not want to sell it with a warranty deed because they would be honestly unsure of what they own. In a case such as this, grantors will offer a quitclaim deed: a deed in which the grantor transfers to the grantee whatever title he or she has, if any, to a given piece of land. Unlike a warranty deed, a quitclaim deed contains no assurance that the grantor has good title and no promise to make any future reparations if the title is defective. Such deeds are typically granted when a defect in the transferor's title is suspected or when the transferor purchased the land as an agent for a third party and subsequently needs to transfer title to the third party. The use of a quitclaim deed is also common during a divorce. In this way, one of the spouses can forfeit any interest in jointly owned property and grant full rights of possession to the other owner spouse.

As you might suspect, there is an element of risk in purchasing property with a quitclaim deed, which usually adversely affects its selling price. In addition, title insurance is generally unavailable for property purchased with a quitclaim deed, and most banks will not issue a standard mortgage for such a property. Therefore, if the buyer wishes to acquire the property, a bank will not approve a loan, and the buyer must either pay cash or seek to borrow from a private lender, who will likely charge a much higher rate of interest.

The Contract of Sale

Although a contract of sale is not necessary for transferring ownership of real estate, it is customary in the United States to have one (see Figure 19.1 for a sample). Such contracts are ruled by the applicable contract law: either in the jurisdiction where the contract was entered into or in the jurisdiction where the real estate is situated. Recall from our discussion of the Statute of Frauds in Chapter 10 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec10.3#sec10.3) that to have a valid contract for the sale of real estate, the contract must be in writing and signed by the party to be charged. If the parties enter into a signed, written contract for the sale and purchase of real estate, and one of the parties to the contract reneges, the courts offer a unique remedy. Instead of suing for monetary damages, courts will award a remedy named speci�ic performance. This means that the court will order the parties to do what they said they were going to do under the contract. So, for example, if the plaintiff agreed to sell her house, the remedy of speci�ic performance would order the plaintiff to transfer the property to the defendant. The reason is that all land is considered unique. And, since it is unique, no amount of money would make the defendant whole. Of course, the defendant would have to pay for the house, but the fact remains that the plaintiff will have to follow through on the promises in the contract. In the event the parties did not reduce the contract to a writing, but instead had an oral agreement, such a contract would not be enforceable in the courts if either party refused to go through with the verbal agreement. Oral contracts for the sale of real estate are not enforceable.

Figure 19.1: Sample contract of sale

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Eminent Domain

One highly unusual way to effectuate a transfer of real estate without need for a contract of sale is a transfer to the state or federal government under its powers of eminent domain. Eminent domain is the power of the federal, state, or local government (originally the sovereign or crown) to seize private property for public use, upon paying its owner the property's market price. In the United States, the federal government is given the power of eminent domain by the Fifth Amendment to the U.S. Constitution. Such a power is also found in the constitutions of the individual states. If the government wishes to take private land for public use, its owners (with few exceptions) have no choice but to deed over to the government all or whatever part of the land it requires.

Typical exercises of the government's eminent domain powers extend to the building of roads, enlargement of parks, and the construction of similar public projects. But the use of eminent domain has expanded in recent years, and the courts have upheld the government's right to seize private land for private development if it does so for a valid public purpose. Valid purposes include creating jobs, stimulating economic activity, increasing tax revenues, attracting tourism, or otherwise improving the quality of life for its citizens pursuant to a development plan. Not only individuals, but entire towns may be called upon to transfer their land to the government (usually quite unhappily) for such projects as new construction or expansion of reservoirs, dams, and similar public works.

Eminent domain is also relied upon in granting necessary easements for power and telephone lines that must pass over private lands. The same is true for government expropriation of partial real estate rights, such as the subsurface rights to private land in order to build a subway system. When such a partial taking of private land for private use is involved, the landowner is compensated for the interest in the property at market value but is otherwise free to use or sell whatever portion of the land was not seized for public use.

Adverse Possession

Adverse possession is a means of acquiring property by maintaining possession of it during a statutorily de�ined period and meeting certain additional criteria. Unlike more common means of obtaining property, which require the transfer of a deed, with adverse possession, title is obtained by meeting the following statutorily de�ined criteria:

The possession must be actual and exclusive;

The possession must be continuous for the entire statutory period (commonly 10 years, but as short as three or as long as 30 years);

The possession must be open and notorious; and

The possession must be hostile and adverse.

Put another way, in order for title to a property to pass by adverse possession, the possession must be actual, open, notorious, and exclusive during the statutory period. Also, the possessor of the property must show that he or she held it without the owner's permission. The requirement that possession be "actual and exclusive" means that the adverse possessor must exclusively occupy the land during the statutory period without the owner having access to it or joint use of it. The requirement that possession be "continuous" means that the adverse possessor cannot stop using the land for the entire statutory period.

For example, let's say the period of adverse possession in a state is 10 years, and an adverse possessor uses land belonging to another for �ive years and then stops using it for a year (or allows the owner to make use of it again for a period of time after �ive years). If the adverse possessor later resumes the possession, the statute begins to run again, and he or she must continue to use the land exclusively for another 10 years uninterrupted before owning it under adverse possession. The requirement that the possession be "open and notorious" means that the adverse possession must be out in the open for the whole world to see. Finally, the requirement that the possession be "hostile and adverse" means that the adverse possessor must use the land, holding it to be his or her own without the permission of the true owner, throughout the statutory period. If the owner gives permission to use the land, of course, there can be no adverse possession. (For an interesting story regarding squatters trying to obtain title to someone's house, click here (http://realestate.aol.com/blog/2012/07/31/squatters-refuse-to-vacate-couples-home) .)

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Adverse possession presents a particularly serious problem for absentee landowners, especially in states with relatively brief statutory periods, such as �ive or 10 years. The law requires property owners to take af�irmative steps to protect their property from others' infringement by taking timely action against trespassers before the latter can perfect their interest in the land under the adverse possession statute. One could say that adverse possession is really a statute of limitations that requires landowners to protect their property rights within a certain period of time or risk losing them. Keep in mind that not all adverse possession claims are nefarious in nature, and that many arise out of honest mistakes, such as a landowner building a structure that is in whole or in part on a neighbor's land because of a mistake in interpreting the land boundaries. In any case, whether the adverse possession is innocent or willful, the claim of the adverse possessor extends only to the land actually occupied and used by him or her during the period of adverse possession. Thus, if Henrietta builds a homestead on one acre of Harry's 10-acre land, she will eventually own only the one acre she has exclusively used throughout the statutory period and not the entire 10-acre tract.

Use of Recording Statutes

Every jurisdiction provides a system for recording deeds. These systems exist in order to give notice to subsequent purchasers of the property of previous transfers of the property. Although deeds are not generally required to be recorded in order to effectively pass title to land, recording a deed offers protection to the purchaser of real property from previous or subsequent fraudulent transfers of title or attachment of liens to the same land by a previous owner or by his creditors (see Chapter 16 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec16.2#sec16.2) , Creditors and Debtors, for more detail). A typical problem in this area arises when a grantor executes multiple deeds to the same property, with the intention of defrauding the grantees. Because there can be only one true owner of real estate in such circumstances, the question becomes: Who has the greater interest? At common law, the answer was simple: "First in time, �irst in right." Thus, the �irst grantee of the land would be entitled to it. Today, the problem has been addressed by states through the adoption of recording statutes that provide a simple means of notifying third parties about the real estate's owners of record. This system provides a means of resolving multiple claims by innocent grantees to the same land.

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19.3 Concurrent Ownership Like personal property, real property can be owned individually or jointly by two or more persons or companies. There are three distinct types of concurrent ownership options of which businesses should be aware: joint tenancy, tenancy in common, and tenancy by the entirety.

Joint Tenancy

Joint tenancy is a means of two or more persons owning real estate together. The most signi�icant feature of joint tenancy is that the property owned by the joint tenants passes automatically to the survivor upon the death of the cotenant. If two people own real estate as joint tenants, then the survivor automatically owns the whole upon the other joint tenant's death. If more than two persons own real estate as joint tenants, the share of any joint tenant who dies is distributed equally among the survivors. For example, if four friends own a home equally as joint tenants, and one dies, the share of each survivor in the property increases from a 25% interest to a 33.33% interest.

It is not necessary that each joint tenant have an equal share in the property. It is possible to have two joint tenants with vastly different ownership interests in the underlying real estate; nevertheless, if any one of them dies, that share passes to the survivors in equal shares. Thus, if two friends owned property as joint tenants, and one held a 95% interest and the other a 5% interest, the survivor would automatically obtain title to the whole property regardless of the original investment in it.

Joint tenants share in the responsibility for keeping up a home and paying taxes and other expenses that naturally result from the ownership of real property in proportion to their ownership interest in the property. Thus, a 10% joint owner of property pays 10% of the property's expenses and receives 10% of any rent or other income that the property produces. Note, however, that the right of joint tenants to occupy or use real estate is not related to their ownership interest; that is, a 10% owner has the right to occupy 100% of the house at all times. This potential problem can be resolved by creating a separate contractual agreement between the joint owners detailing their rights of occupancy.

The interest of a joint tenant to real property is freely transferable during the joint tenant's life. It can be sold, leased, or given away at will. This presents another potential problem for joint tenants, since any one of them has the power to freely dispose of the property interest to any person or persons desired. For this reason, joint tenants often have a separate contract detailing restrictions on the transfer of the property. Such a contract may include a clause about the cotenants' right of �irst refusal to purchase the interest of a joint tenant who wishes to sell an interest in the property before an offering is made to the general public. If a joint tenant's interest is transferred, the new tenant becomes a tenant in common rather than a joint tenant. This tenant's interest then passes to his or her heirs upon his or her death rather than to his or her cotenants.

A joint tenancy is generally severable at any time by any one joint tenant, who can petition a court to partition the property or to force its sale.

Tenancy in Common

Tenancy in common is similar in all respects to joint tenancy with one important exception: The interest of a tenant in common who dies passes to his or her estate rather than to the surviving tenants in common. In other words, tenants in common enjoy the same rights and responsibilities as joint tenants except that there is no right of survivorship provision in the tenancy.

Tenancy by the Entirety

Tenancy by the entirety is a form of joint tenancy reserved for husbands and wives. The main difference between joint tenancy and tenancy by the entirety is that, unlike tenants in common or joint tenants, a tenant by the entirety cannot transfer his or her interest in the underlying property without the signature of the cotenant—in this case, the spouse. The creditors and holders of unsatis�ied judgments against each spouse may, however, attach a lien on the spouse's interest in a tenancy by the entirety.

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19.4 Public and Private Restrictions on Land Use Generally speaking, owners of real estate have the right to use their land in any way they see �it, provided that the use is permitted by law. However, limits to these rights can be imposed by the government and through private agreements among landowners.

Zoning

Governments exert control over private land through zoning regulations. States have the power to control the private use of land under their general police powers, through which states regulate private conduct in order to promote the general welfare of citizens in such areas as health, safety, and welfare. Public land use regulation is carried out primarily at the local level, with the state empowering local city or town zoning boards to regulate local land use through zoning regulations. Zoning regulations affect architectural and structural building design as well as limit allowed land uses. For example, zoning ordinances might divide communities into areas that permit farming, heavy and light industry, and residential use of real estate, or any combination of these.

When an existing land use classi�ication is changed by a zoning board, persons who had previously used their property in a way that has become illegal are typically allowed to continue their nonconforming use of their land, at least for a period of time (usually for as long as the existing owner retains title to the land and continues to use it in the nonconforming way). In addition, zoning authorities have the power to grant a variance to any person or business that petitions the authority for an exemption to the zoning regulations. Variances permitting deviation from the zoning ordinance are typically not granted unless the petitioner can convince the local authority that the zoning ordinance represents an undue hardship.

Private Restrictions

In addition to the zoning ordinances in a given area, individuals have the ability to restrict otherwise permissible uses of land through private agreements. One way of accomplishing such voluntary restrictions on land use is by means of negative easements. For instance, if a given community wants to make sure that some permissible land uses they �ind disagreeable are not carried out by any of its members, they can execute a negative easement preventing such use of their land. A condominium association is a good example of a group that uses this sort of voluntary zoning restriction. This is often done in new subdivisions and in planned communities. Such restrictive covenants can be included in the original deeds to land as appurtenant easements that "run with the land" so that all subsequent owners of the property are bound by them.

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Key Terms

Click on each key term to see the de�inition.

abandoned property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Intentionally placed property given up by the debtor.

adverse possession (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A means of acquiring property by maintaining possession of it during a statutorily de�ined period and meeting certain additional criteria.

chattel (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Tangible, movable personal property.

concurrent ownership (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

When two or more people own the same real property.

contract of sale (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The agreement entered into between the seller and the buyer setting out the terms of the sale of real property.

deed (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The document that conveys title to real property.

dominant estate (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The land that bene�its from an easement.

donee (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Person who receives a gift.

donor (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Owner of property who transfers it to another.

easement (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Right to use private property of another for a limited purpose, e.g., as a thoroughfare.

eminent domain (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The right of the government, granted by the U.S. Constitution, to take property from an owner for a public purpose but requiring the government to pay the owner reparations.

�ixtures (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Property that is �irmly attached to land or buildings that is characterized as real property.

grantee (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The purchaser of real property.

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grantor (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The owner of real property who transfers the property to the grantee.

joint tenancy (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A form of concurrent ownership in which the last survivor obtains title to all the property.

license (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

In real property, a temporary, revocable privilege to enter onto the lands of another for a limited time and purpose.

lost property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Belongings unintentionally placed whose owner forgets where they were left.

misplaced property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Property intentionally placed whose owner forgets where.

nonconforming use (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The continued use of private land for a nonzoned purpose after the zoning laws have changed; usually this use expires with the owner's loss of title.

personal property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

All tangible, movable property other than land and �ixtures.

pro�it à prendre (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

In real estate, a right that gives its holder the ability to go onto the land of another and to remove something from it or to make use of another's soil.

quitclaim deed (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A deed that transfers whatever interest the grantor has in the property but without guaranteeing good title.

real property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Land and all things attached to the land (�ixtures).

recording statutes (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Rules that vary from state to state about how to �ile a deed and who has priority ownership with regard to when the deed was �iled.

restrictive covenant (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A voluntary, private limitation on otherwise legal land use by a community or association that applies to its member landowners.

right of survivorship (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

In a joint tenancy, the concept that the last surviving tenant acquires title to all the property regardless of interest share.

servient estate (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The land over which an easement crosses.

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statute of limitations (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A law that sets the speci�ic time in which parties must bring a lawsuit to protect or enforce their rights. The statute of limitations is different for each cause of action. For example, for breach of contract, it might be six years in one state and four in another.

tenancy by the entirety (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A form of joint tenancy reserved for husbands and wives in which a tenant cannot transfer his or her interest in the underlying property without the signature of the cotenant, or spouse.

tenancy in common (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A form of joint ownership of real property.

title (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Having the right to legal ownership, e.g., of a car. Also, the instrument (paper) that gives evidence of that right.

title by gift (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Transfer of personal property from the donor to the donee with intent to transfer.

title by possession (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Acquiring title by taking property into one's possession, e.g., by capturing a wild animal or taking over abandoned property.

title by purchase (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Acquiring title to personal property pursuant to UCC Article 2.

treasure trove (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Property that is veri�iably antiquated and has been concealed for a suf�iciently long time to indicate that the owner is probably dead or unknown.

valid constructive delivery (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The donor's af�irmative steps to deliver property, or the means of obtaining it, to the donee.

variance (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Permission given by a governmental entity to use property in a way that violates zoning laws.

warranty deed (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

A deed that transfers title in the grantor's property and guarantees that there are no claims against the property.

zoning (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Local governmental regulation of approved uses of private property.

Chapter 19 Flashcards

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Critical Thinking and Discussion Questions

1. What is a warranty deed? What is a quitclaim deed? Which is more desirable?

2. May property be transferred without a contract of sale? How?

3. What are the �ive requirements for a valid deed?

4. What is adverse possession? What are the criteria for establishing title through adverse possession?

5. De�ine joint tenancy, tenancy in common, and tenancy by the entirety.

6. What is a variance? What is generally required for a variance to be granted?

7. Fred purchases a 42-inch LCD television set for his friend Gina and has it shipped to her home as a surprise gift. On the day that the set is to be delivered, Fred has a falling out with Gina and tells her: "I had bought a large-screen television as a birthday gift for you that was supposed to be delivered today, but I've changed my mind and I'm going to have the delivery canceled." Gina immediately retorts, "Too late—I accept your gift." a. Can Fred cancel the delivery, or is he too late to rescind the gift? Explain.

b. If the television set had already been delivered and accepted by Gina before the falling-out but Fred had stopped payment on the check he'd used to pay for the set, would the gift have been revoked?

8. Greg Grantor wishes to make a gift of a one-acre tract of land he owns to his friend Gina. He orally tells her in front of 10 reliable witnesses that the land is hers forever and that she may dispose of it at will. Gina promptly accepts the gift and takes possession of the land. A month later, Greg dies and his executor serves notice on Gina that she must vacate the land. Gina refuses to do so, claiming the land is rightfully hers. What will the result be?

Now assume that, after making the oral statement of his intention to give Gina the land, Greg writes on a piece of paper with a pen the following:

I, Greg Grantor, hereby give to Gina Grantee all my rights and interest in a one-acre tract of land I own called Blackacre with the intent that she will be the owner of the land forever. [signed] Greg Grantor

Greg then gives the paper to Gina and dies a month later.

a. Based on these facts, if Greg's executor demands that Gina quit the premises, what will the result be?

b. What interest, if any, does Gina have after the transfer of the paper to her?

c. Will she be able to record the instrument as a deed? If so, what type of deed is it?

Intentionally placed property given up by the debtor.

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Chapter 20

Intellectual Property Musical compositions, books, and new designs are all types of intangible property interests covered by the phrase intellectual property. Just like personal property, intellectual property can be protected in its use and can be sold or conveyed to another. This chapter will discuss the basic types of intellectual property and some of their unique characteristics.

The U.S. Constitution gives to Congress in Article I, Section 8 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/appa#a1.8) , the power to "promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Congress has secured these rights through appropriate legislation and the creation of the U.S. Patent and Trademark Of�ice to regulate the issuance of patents, copyrights, and trademarks in accordance with congressional guidelines.

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20.1 Protecting Intellectual Property From Infringement Despite its protected status, intellectual property is harder to shield from theft and copyright or patent infringement than is tangible personal property; also, it is easier to prove interference with tangible property rights than with intangible ones. For instance, if a carpenter's creation, say a chair, is stolen, damaged, or used by another without the carpenter's consent, the carpenter will have relatively little trouble proving the infringement. But a singer whose song or music is stolen, or inappropriately "borrowed" by another in whole or in part, will often have a harder time making his or her case. Interference with intangible property rights is often easily accomplished and dif�icult to trace.

Indeed, most people infringe on others' intangible property rights on a regular basis, often unaware that they are doing so. Here are a few everyday examples that constitute unlawful interference with intangible property rights:

Copying commercial software or a DVD from a friend;

Downloading copyrighted music or videos from the Internet or via peer-to-peer �ile transfers;

Ripping MP3 or wav music �iles or MP4 video �iles of music CDs or video DVDs you own to upload to a friend's audio or video player; and

Incorporating the ideas of others in term papers or other writing without giving credit.

In this chapter, we will examine the basic laws that protect intellectual property rights in the United States in the form of patents, copyrights, trademarks, and service marks.

Patents

A patent is an exclusive right granted to an inventor by the federal government to pro�it from the use of the invention for a period of 14 years for design patents and 20 years for utility and plant patents from the date of �iling the patent application. During the 14- or 20-year period in which the inventor is given the exclusive right to exploit the invention covered by the patent, the patent itself is deemed intangible personal property. As such, it can be sold, given away, or leased to anyone the inventor chooses for whatever consideration is mutually agreed upon. After the patent expires, the invention becomes part of the public domain and may be used by anyone without the need to compensate the inventor.

In order to be patentable, the subject matter for which a patent is sought must be new, nonobvious, and useful, and it must not infringe on any other existing patent. Here are some examples of patentable items:

Devices (most patents involve some type of these);

Novel chemical substances (e.g., a new drug or a better lubricant);

New compositions of matter (such as genetically engineered microorganisms or plants with special properties); and

Novel manufacturing techniques or processes, provided they are both new and useful (e.g., a process discovered to better extract sap from maple trees in order to make maple syrup, or a new method of extracting oil from shale rock).

Application for a patent is made to the U.S. Patent and Trademark Of�ice (USPTO). The website for this of�ice is located at http://www.uspto.gov (http://www.uspto.gov) . If you peruse this site, you will �ind not only the basics of intellectual property law but also helpful videos that describe the intellectual property protection process. In addition, the site has all of the forms necessary for �iling, such as the patent application. In the application, the inventor must show the following:

How the invention works;

Detailed technical drawings and other supporting evidence of how the device can be manufactured; and

A narrative detailing the novelty and usefulness of the object that make it worthy of patenting.

Upon the grant of a patent, the inventor is protected from any infringement during the patent's useful life. Any unauthorized use of the patented idea by a third party will result in a valid civil suit for damages by the inventor against the infringing party, regardless of the infringer's good faith or lack of actual knowledge of the existence of the patent. If the infringement is malicious, a court is empowered to award both actual damages (such as lost royalties) as well as punitive damages equal to three times the actual damages caused by the infringement, as well as court costs and attorney's fees if the judge deems them appropriate. Where patent infringement is not malicious, but rather caused by negligence or ignorance of the infringer, the typical damages awarded are a reasonable royalty for use of the inventor's patent.

Copyrights

The Federal Copyright Act of 1976 provides protection to authors of literary, dramatic, musical, choreographic, and artistic works, including motion pictures and other audiovisual works. The act is very broad in scope and is intended to cover any original work of authorship, regardless of the medium, including computer software (both electronic programs and written program listings).

Any qualifying work can be copyrighted by registering with the USPTO in Washington, D.C., but registration is not necessary to invoke copyright protection. A work is deemed copyrighted as soon as it is expressed in some tangible form, such as by writing it down or typing it into a computer and saving it as a

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Seth Perlman/Associated Press

�ile. Nevertheless, it is a good idea to formally register copyrighted work because registration is a prerequisite to being able to bring an infringement action and recover damages.

For works created after January 1, 1978, copyright protection lasts throughout the author's life and for an additional 70 years after the author's death. Copyrights owned by publishers, such as works produced by authors on a work-for-hire basis, last for 95 years from the date of publication or 120 years from the date of creation, whichever comes �irst. During the copyright period, the author (and the author's estate for 70 years after the author's life) has the exclusive right to reproduce the work or to make any derivative works based on it. Authors are also entitled to royalty payments upon public use of copyrighted works, such as the broadcasting of a song or music video over the airwaves or the public performance of a play.

Limited fair use of copyrighted work can be made without it constituting copyright infringement. Fair use includes educational purposes, as well as news reporting and literary criticism. To qualify as fair use, the portion of the copyrighted work must be relatively small and not unduly infringe on the work as a whole. For example, quoting from one page of a novel for purposes of literary criticism or copying one article from a newspaper for classroom distribution is likely to be covered under fair use. But if the amount of material used is excessive, a copyright infringement occurs. In determining whether a speci�ic instance of alleged copyright infringement is covered by the fair use doctrine, and is thus exempt from liability, the courts perform a balancing test between the author's right to pro�it from his or her work and the educational or literary value of the infringement. Courts in recent years have shown decreasing tolerance for allowing a fair use exception to copyright infringement actions, even in nonpro�it educational settings. Penalties for copyright infringement can include civil damages for infringement, as well as punitive damages and criminal penalties for willful infringement.

A Closer Look: Copyright Infringement

In Bright Tunes Music v. Harrisongs Music, 420 F. Supp 177 (S.D.N.Y. 1971), George Harrison of the Beatles was accused of copyright infringement because his song My Sweet Lord sounded identical to another song, He's So Fine. This landmark case is an excellent example of a copyright infringement case. For an excellent website explaining the case and providing access to both the songs and a comparison of the actual musical tunes from each one, click here (http://cip.law.ucla.edu/cases/1970-1979/Pages/brightharrisongs.aspx) . After reading the opinion of the court and the analysis contained on the website, answer the following questions:

1. What was the grace note to which the court referred, and why was it signi�icant?

2. Did the court conclude that George Harrison intentionally plagiarized or not?

3. What was the test the court used to determine whether a copyright infringement had taken place?

The Digital Millennium Copyright Act of 1998 and the No Electronic Theft Act of 1997 passed by Congress signi�icantly enhanced the protection offered by the Copyright Act of 1976 for copyrighted material in digital form. The newer legislation provides stiff penalties for copyright infringement of up to $250,000, even for private, noncommercial infringement.

Trademarks

A trademark is any symbol, picture, design, or words adopted by a manufacturer to distinguish its products from other similar products in the market. In order to be capable of being registered with the USPTO, a trademark must be unique and cannot be a generic name. Product names, such as Coca-Cola® and Coke®, can be registered trademarks, as well as slogans adopted to identify a product ("The real thing" relating to Coke®, for example). But the generic word cola or soda by itself cannot be a trademark, since it is not unique but rather descriptive of a type of product. Company logos and graphic designs are also capable of being registered trademarks. Thus, 7-Up® and The Uncola® are registered trademarks for the well-known soft drink, and so is the red dot used by the soft-drink maker in its advertising and as part of its product's name. Likewise, the distinctive design in product labels can be covered by a trademark.

To be registered, a trademark must be used either in interstate commerce or internationally. When a trademark is registered, it may be contested by any company that claims an infringement of its own trademark for a period of �ive years. If a new trademark is not contested within that time period, it becomes incontestable. Trademarks also can be registered before they are used, but they must become public within four years or they will lose their protection.

The registration is valid as long as the owner �iles all postregistration maintenance documents in a timely manner. Once issued, a new registered trademark can be renewed after �ive years and is renewable every 10 years thereafter upon a showing that it is still in use and has not been abandoned. Trademarks registered before 1990 are renewable every 20 years. Application to renew a trademark must be made within three months of its expiration. Like all personal property, a trademark may be sold or assigned by its owner.

Service Marks and Certification Marks

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The name Coca-Cola is a well known example of a trademark.Service marks, certi�ication marks, and collective marks are closely related to trademarks and treated in exactly the same way for purposes of federal registration and renewal. A service mark is any distinctive mark used by a service industry for purposes of advertising or sales. The radio and television network designations ABC, NBC, CBS, and FOX, for example, are all service marks, as are the CBS eye symbol and the NBC peacock. Likewise, the symbols used by book publishers along with their names on book spines are considered service marks.

Certi�ication marks, on the other hand, are speci�ic words or symbols adopted by a group of companies or government agencies to denote the quality, origin, or other attribute relating to their goods. Typical certi�ication marks include USDA Choice, UL [Underwriters Laboratories] Approved, and the union labels (e.g., ILGWU) attached to goods manufactured in the United States by textile and other unionized workers.

Remedies for Infringing a Registered Mark

It is an infringement of a registered mark to reproduce such a mark or to imitate it without the consent of the registrant by any means for a commercial purpose if doing so would tend to confuse or deceive the public as to the genuineness of the goods involved. Not only can third parties not misappropriate the registered trademark, service mark, or certi�ication mark of another, but even using a misleading approximation of such a mark for commercial purposes is illegal if the public may be misled as to the identity of the goods. Thus, a new soft-drink maker not only can't use the name Pepsi Cola or any registered mark associated with the nationally known soft drink, but it can't even use a name or adopt a logo that is close enough to confuse the general public. Peppy Cola, for example, might be an allowable trade name for such a drink, but if the manufacturers adopted a lettering style or can design that approximated the Pepsi Cola® trademarks for these, it would constitute trademark infringement. The question of whether a particular trade name or trademark is suf�iciently similar to the existing registered marks of a product is usually a matter for the trier of fact to determine.

The damages allowable for infringing a registered mark vary depending on the nature of the infringement. Where an infringement is innocently made by a printer who manufactures literature, packaging, or any other material to be used in the sale or marketing of the product, the only remedy available against the printer is an injunction to prevent it from continuing to create such infringing material. Injunctive relief is likewise the only remedy available against a television station, newspaper, or other medium that innocently runs commercials containing infringing material.

Where the infringement is intentional, however, and made for the purpose of confusing or deceiving the public, the party who suffers an infringement of a registered mark has many legal protections. The party may be both awarded injunctive relief and recover any pro�its made by the infringer from the infringement, as well as any damages sustained by the holder of the infringed registered mark as a result of the infringement. In addition, treble damages (three times the actual damages of the infringer's actual pro�its made from the infringement) may be awarded, as well as court costs and attorney's fees.

Trade Secrets

Trade secrets include business plans, mechanisms, manufacturing techniques, and compiled data that give a business an advantage over its competitors. Although some trade secrets (e.g., formulas for the manufacture of products) could be patented, they often are not, in order to extend the useful life of the formula and to keep it secret. If, for example, the formula for making Coca-Cola® were patented, its ingredients would be a part of the public record and the patent would give the company only a 20-year monopoly on its manufacture. By maintaining a formula as a trade secret, however, the company can maintain its monopoly over the manufacture of a given product inde�initely, or until its competitors can duplicate or reverse-engineer the formula themselves, whichever comes �irst. Likewise, customer lists and other information vital to the running of a business are considered trade secrets.

The signi�icance of trade secrets is that they are protected in two ways:

1. Employees who have access to such information are obliged not to divulge it. They can be enjoined from doing so, as well as sued for damages if they misappropriate or divulge trade secrets to which they had access as employees; and

2. Because trade secrets are considered the personal property of a company, any illegal access to, or theft of, such secret information is both a crime and a tort that can subject violators to criminal and civil liability.

If the information contained in a trade secret is discovered through lawful means, however, the discoverer is free to use it. Thus, if a new company stumbles upon another's secret manufacturing techniques or formulas by chance or by its independent research into the product, it is free to use that formula or manufacturing technique for itself unless these are covered by a patent.

Intellectual Property Rights

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Click here (https://media.thuze.com/MediaService/MediaService.svc/constellation/book/AUBUS670.12.2/{pdfs}ch20.pdf)

for a pdf of this slideshow.

Cybersquatting

In 1999, Congress passed into law the Anticybersquatting Consumer Protection Act (ACPA), 15 U.S.C. § 1125(d). The purpose of this law was to prevent someone from registering an Internet domain name that is confusingly similar to another's. For example, suppose that someone registered the name Coke. When the real company Coca-Cola realized that the name was already registered, it would either not have access to the domain name, or it would have to purchase the rights to the domain name from the holder; thus, the holder would make a substantial amount of money just by "guessing" what domain names to register and then holding on to them until the real owner came along. This federal law makes it a crime to "squat" on someone else's domain name unless the squatter truly has an interest in creating a legitimate website. In the example given, the registrant would be in violation of this law.

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20.2 International Issues of Intellectual Property With the advent of the Internet and globalization of markets, concepts of intellectual property cannot be limited to the United States alone. Any intellectual property issues involving copyright, trademark, and trade name necessarily involve international concerns, which in turn require some familiarity with treaties. One of the most important treaties in this area is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). This is an international treaty administered by the World Trade Organization (WTO) that outlines several important trade-related aspects of intellectual property. Speci�ically, it requires signatory countries to adhere to its criteria for intellectual property monopoly grants of limited duration and requires that they adhere to the Paris Convention, Berne Convention, and other WTO conventions. The WTO's criteria set minimum standards for granting a monopoly over any type of intellectual property, as well as duration limits, enforcement provisions, and methods of settling disputes.

More information about international intellectual property treaties can be found at the World Trade Organization website (http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm7_e.htm) .

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Key Terms

Click on each key term to see the de�inition.

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An international treaty dealing with intellectual property issues.

Anticybersquatting Consumer Protection Act (ACPA) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Codi�ied at 15 U.S.C. §1125(d), the purpose of this law is to prevent someone from registering an Internet domain name that is confusingly similar to another's and then to "squat" on that domain.

certi�ication marks (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Speci�ic words or symbols adopted by a group of companies or government agencies to denote the quality, origin, or some other attribute relating to the goods.

collective mark (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Any word, phrase, symbol, or design owned by a cooperative, association, or other group or organization that indicates the source of the goods or services.

copyright (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An exclusive right to pro�it from literary, dramatic, musical, choreographic, and artistic works for 70 years plus the life of the author.

Digital Millennium Copyright Act of 1998 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal legislation criminalizing technology that circumvents measures that control access to copyrighted works.

fair use (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The use of copyrighted materials without paying the author in limited circumstances such as literary criticism and news reporting.

Federal Copyright Act of 1976 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Legal protection to authors of literary, dramatic, musical, choreographic, and artistic works, including motion pictures and other audiovisual works.

intellectual property (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Intangible personal property; covers ownership rights over things that do not have physical existence, e.g., music, copyrights, trademarks, and trade names.

No Electronic Theft Act of 1997 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Federal legislation that provides for criminal sanctions for certain types of copyright infringement.

patent (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The right given to an inventor by the U.S. government to pro�it from an invention.

patent infringement (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Use of someone else's invention without his or her permission (during the time period in which the patent is exclusive).

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patentable (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Describes when the subject matter for which a patent is sought is new and does not infringe on any other existing patent.

public domain (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Free for anyone to use without payment to the original author or inventor.

service mark (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Any distinctive mark used by a service industry for purposes of advertising or sales.

trade secrets (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Business plans, mechanisms, manufacturing techniques, and compiled data that give a business an advantage over its competitors.

trademark (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

Any symbol, picture, design, or words adopted by a manufacturer to distinguish its products from other similar products in the market; capable of being registered with the USPTO.

TRIPS (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

See Agreement on Trade-Related Aspects of Intellectual Property Rights.

U.S. Patent and Trademark Of�ice (USPTO) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

The federal agency responsible for granting U.S. patents and registering trademarks. Also advises the president, the secretary of commerce, and U.S. government agencies on intellectual property policy, protection, and enforcement and promotes intellectual property protection around the world.

World Trade Organization (WTO) (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/section

An organization that deals with and attempts to resolve trade issues between countries.

Chapter 20 Flashcards

Critical Thinking and Discussion Questions

1. What is a patent? What government of�ice is in charge of granting patents?

2. Are sculptures, paintings, photographs, and choreographed dances protected by copyright? Explain.

An international treaty dealing with intellectual property issues.

Click card to see term 👆

Choose a Study ModeView this study set

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3. How does a work become copyrighted? How long does copyright protection last?

4. What is a trademark? A service mark? A certi�ication mark?

5. How long do registered trademarks last?

6. Imalia Inventor devises the proverbial better mousetrap. She promptly begins its manufacture in her garage and starts selling the mousetraps to local businesses and private individuals through a direct marketing campaign. Sales are brisk, and she soon turns her invention into a pro�itable business that catches the attention of other mousetrap manufacturers throughout the world. Within six months, mousetraps identical to hers �lood the market at a much lower price and drive her out of business. Furious at this injustice, she wants to sue for patent infringement and for interference with trade secrets. What would the result be?

7. Wanda Writer compiles a book of her poetry as well as a rough draft of a novel using her computer. She never prints the material, since she considers it a work in progress, preferring to do all her revisions on her computer. Every week, she burns a backup of the material onto a DVD. When the work is completed, she takes the DVD to work, intending to use her color laser printer there to print out the material to send to selected publishers for their consideration. On her way to work, however, she has her purse stolen by a thief in the subway. The thief takes her valuables but throws away the DVD, having no use for literature. The DVD is later found by chance by an English professor who, impressed with the work and unable to determine its rightful owner, publishes the novel in his own name and copies two of the 100 poems for distribution in his class. Wanda eventually learns of the professor's actions and decides to sue him for copyright infringement, both for the publication of the novel in his own name and for the unauthorized use of her poetry in the classroom. What is the result on both claims? Explain fully.

8. The makers of a new toothpaste called West launch their new product on the market with a heavy ad campaign in newspapers, magazines, and television stations across the nation. The ads feature a western theme that revolves around cowboys, gun�ighters, and similar characters endorsing the product. Although the commercials are unique, the packaging and lettering of the toothpaste are very similar to that of another leading dentifrice, Crest®.

Based upon these facts, answer the following questions: a. Does there seem to be a trademark infringement here? What will the makers of Crest® need to show to succeed in a trademark infringement action?

b. Assuming that the lettering and designs are found to infringe Crest's registered trademark, what damages should be assessed against the manufacturers of West toothpaste?

c. What damages can the makers of Crest seek against the media for running the infringing commercials?

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Unit VI

Issues in Employment

Keith Srakocic/Associated Press

Chapter 21: Establishing the Employment Relationship

In this chapter you will:

Identify the unique characteristics and liabilities of different categories of workers.

Understand how respondeat superior and negligent hiring affect an employer's liability.

Identify major legislation that governs employment–management relations.

Chapter 22: Introduction to Antidiscrimination Law

In this chapter you will:

Understand the Commerce Clause and the Affectation Doctrine and the role of each in enforcing antidiscrimination law.

Understand the major components to a discrimination lawsuit, what each party needs to prove, and their respective burdens of proof.

Chapter 23: Discrimination on the Basis of Race

In this chapter you will:

Understand the application of Title VII to race discrimination and how it impacts business.

Identify steps that a manager can take to avoid race discrimination lawsuits.

Chapter 24: Discrimination on the Basis of Sex

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In this chapter you will:

Understand the application of Title VII to sex discrimination and how it impacts business.

Identify other key legislation related to discrimination based on sex.

Chapter 25: Sexual Harassment

In this chapter you will:

Distinguish between different forms of sexual harassment.

Understand what an employer's liability is in sexual harassment cases.

Chapter 26: Other Types of Discrimination

In this chapter you will:

Understand the application of Title VII to religious discrimination and how it impacts business.

Understand the application of Title VII to discrimination based on national origin and how it impacts business.

Understand the provisions of federal legislation that cover discrimination based on disability and age.

Identify examples of discrimination against nonprotected classes.

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Chapter 21

Establishing the Employment Relationship In thinking about setting up a business, you may have considered that all workers are classi�ied as employees, but this is not true. There are, in fact, numerous forms that an employer–employee relationship can take or transform into. This chapter begins with those types of relationships and examines the liability that can result from each. It will then look at some of the major labor law legislation from the 20th century.

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21.1 Employer–Employee Relationship When an employer hires someone to work, the likelihood is that person will be categorized as an employee. Many students are unaware that the worker could actually be categorized in numerous ways: as an employee, an agent, or a servant. Some workers are not employees at all, but rather independent contractors (see Table 21.1). Each one of these types of workers has unique characteristics and liabilities.

What makes someone an employee? It is well settled in law that employees have distinct characteristics. Most courts consider the biggest factor in determining whether or not someone is an employee to be how much control the employer has over the details of the employee's work. For example, an employer characteristically tells the employee when to come to work, when to leave, what job he or she will be doing, how to do it, and all the other typical requirements of the workplace.

Another characteristic of an employer–employee relationship is that the employer supplies the tools, place of work, and other instrumentalities (means, agency) that make the place one of work. The employer is also engaged in a distinct occupation or business, as opposed to someone who hires a worker for only one job. In employer–employee relationships, there is continuity: An employee receives a regular paycheck and is covered by workers' compensation. Usually employees are engaged for a longer length of time and complete work that is the regular business of the employer. The employer is responsible for deducting taxes from the employee's check as well as for administering health insurance, pension plans, workers' compensation, and Social Security bene�its for the employee. For a look at some of the distinctions between the two categories of workers, see the case Carnation Co. v. NLRB, 429 F.2d 1130, 1134 (9th Cir. 1970) (available here (http://bulk.resource.org/courts.gov/c/F2/429/429.F2d.1130.23255.html) ).

If an employee commits a tort while going about the employer's business, the language in law changes from that of employer–employee to that of master– servant, with the employer as the master. In fact, the phrase master–servant is generally associated with employees who commit torts while on the job, although some writers use it interchangeably with employer–employee.

An employee might also be an agent. This is a special type of employee who has the power to enter into contracts that bind the employer, now called a principal, to third parties. This relationship, and the attendant duties and liabilities, will be covered in Chapter 27 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/ch27#ch27) , Principal–Agency Law.

Finally, the employee might not actually be an employee at all but rather someone called an independent contractor, who is self-employed (see Chapter 28 (http://content.thuzelearning.com/books/AUBUS670.12.2/sections/sec28.1#sec28.1) for more about the sole proprietorship business model). From a legal standpoint, the greatest signi�icance of the employer–employee relationship is that of respondeat superior. This phrase means "the master responds for the torts of his servant." The translation might be "the employer pays for the torts of his employees." This means that if an employee is acting within the scope of employment and commits a tort, then the employer must pay for the damages. Consider the following hypothetical situation:

USB Stores hires Alan to deliver goods to customers. In so doing, Alan gets into a car accident and seriously injures Melba. Melba isn't going to sue Alan, who has no money. Instead, Melba will sue the defendant with the most money—USB Stores—under the theory of respondeat superior. If Melba can prove that Alan was an employee and that he was within the scope of performing his duties when the negligent act (tort) occurred, then USB will have to pay damages to Melba. If, on the other hand, Alan was not an employee but an independent contractor, then the employer would not be liable for Alan's tort. Instead, Melba's sole recourse would be against Alan personally.

There is another reason that being an employee is signi�icant. If the employee is going about the master/employer's business, and the employee (not a third party) is injured or dies, then the employee can recover money only through workers' compensation.

The following attributes qualify one as an independent contractor:

The contractor is often hired for one particular job;

The contractor is not directly supervised by the person hiring him or her (may be working offsite for the hirer);

The contractor is not receiving regular pay, but instead is being paid once (or in installments) for completing the work;

The contractor supplies his or her own tools or equipment to complete the job;

The person or company paying does not deduct Social Security or cover workers' compensation; and

Most important, the hirer is not responsible for torts committed by the independent contractor.

In lawsuits in which the employer is sued under the theory of respondeat superior, the employer often will try to prove that the worker is not an employee but an independent contractor. In lawsuits where the employer is sued for injuries on the job, the worker will try to prove that he or she is an independent contractor and not an employee. In deciding such questions, courts weigh a number of factors in an attempt to determine the nature of the relationship.

Table 21.1: Legally recognized employment relationships

How Formed Resulting Liability

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Employer– employee

Employer hires employee to carry out the business and directs the employee in all details of the work.

Employer is obligated to comply with all state and federal laws regarding taxes, workers' compensation, and the like.

Master–servant Employer hires employee to carry out the business, as in employer–employee relationship; then employee commits a tort while so doing.

Employer is liable for torts of the servant (if the servant is within the scope of employment) under the doctrine of respondeat superior.

Principal–agent

Employer hires employee to carry out the business, as in employer–employee relationship; employer gives employee added responsibilities of entering into contracts for the employer.

Employer, now the principal, is bound by the contracts entered into by the agent on his or her behalf.

Employer– independent contractor

Employer hires a worker for a project only. Employer is not liable for the torts of the worker, and the worker cannot enter into contracts on behalf of the employer.

How do the courts differentiate between an employee and an independent contractor? Consider the following case excerpts, which discuss whether or not an emergency room doctor was an employee–servant or an independent contractor:

Cases to Consider: Williamson v. Coastal Physician Services of Southeast, Inc.

Williamson v. Coastal Physician Services of Southeast, Inc.251 Ga. App. 667, 554 S.E.2d 739 Ga. App. (2001)

On June 14, 1996, Joe Williamson was experiencing shortness of breath, so he went to the emergency room of Columbia Fairview Park Hospital in Dublin. In the emergency room, he was treated by Dr. Sam Johnson, who diagnosed Williamson with cellulitis, hyperglycemia, and chronic obstructive pulmonary disease. Dr. Johnson discharged Williamson, but Williamson returned to the emergency room six hours later. Dr. Johnson saw Williamson and again discharged him. On June 17 and 20, 1996, Williamson went to Dr. Andy Williamson's of�ice, where he was treated and released. On July 1, 1996, Joe Williamson was admitted to the Carl Vinson VA Medical Center. The following day he died.

Charlotte Williamson, surviving spouse and administratrix of Williamson's estate, brought this medical malpractice lawsuit against the hospital, Dr. Johnson, Dr. Williamson, and Coastal Physician Services, which had hired Dr. Johnson to work in the emergency room pursuant to a staf�ing agreement with the hospital. The lawsuit claims that Coastal is vicariously liable for the actions of Dr. Johnson. Coastal moved for summary judgment, arguing that it cannot be held liable for the actions of Dr. Johnson because he is an independent contractor and not an employee.

***

We determine whether a person is an employee or an independent contractor by examining whether the employer has assumed the right to control the time, manner, and . . . the person's actual hours of work. The right to control the manner and method means the employer has assumed the right to tell the person how to perform all details of the job, including the tools he should use and the procedures he should follow.

***

In support of its motion for summary judgment, Coastal presented the af�idavit of Dr. Johnson and a copy of its agreement with him. In the af�idavit, Dr. Johnson stated that he would inform Coastal of the times he was available to work in the Fairview hospital emergency room, that Coastal had the right to schedule him to work only at those times, and that Coastal never attempted to schedule him for work at a time not designated by him. He further stated that Coastal had no right, and never attempted, to control the manner or method by which he diagnosed or treated patients in the emergency room.

***

The contract between Dr. Johnson and Coastal, entitled Independent Contractor (Physician) Agreement, supports Dr. Johnson's af�idavit. The contract speci�ically provides that each month Dr. Johnson shall notify Coastal of the days and hours that he is available to work in the emergency room, and that Coastal will schedule him to work based on his noti�ication of availability. Moreover, the contract provides that Dr. Johnson shall act as an independent contractor practicing his profession of medicine, and that Coastal shall have no control over the manner or method by which he performs his professional medical practice.

Because the evidence unquestionably shows that Coastal did not control the time, manner or method of Dr. Johnson's work, the trial court correctly concluded that he is an independent contractor, and that Coastal cannot be held liable for his acts. We therefore af�irm the trial court's grant of summary judgment to Coastal.

Read the full text of the case here (http://caselaw.�indlaw.com/ga-court-of-appeals/1216436.html) .

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Questions to Consider

1. What type of employee did the court decide Dr. Johnson was?

2. What were the factors the court considered in deciding the type of employee he was?

3. What was the signi�icance of Dr. Johnson being an independent contractor as opposed to an employee?

What would happen if an employee were asked to "switch roles" at the place of employment? Would he or she still be considered an employee in the "new role"? In the following case, the plaintiff, a secretary at Sea World, was asked to put on a bikini and ride Shamu the whale for some publicity photos. When the whale bit her, she argued that she was not an employee, thus hoping to be able to sue the employer for her injuries.

Cases to Consider: Eckis v. Sea World

Eckis v. Sea World, 64 Cal. App. 3d 1 (1976)

Plaintiff was trained for the ride by Sea World trainers in the tank at Sea World during normal of�ice working hours. First she practiced riding Kilroy, a smaller, more docile whale, while wearing a bathing suit. During her one practice session on Shamu, she wore a wetsuit, fell off, but swam to the edge of the tank without incident. On April 19, plaintiff became apprehensive for the �irst time when one of Sea World's trainers said he was not going to watch her ride Shamu because it was "really dangerous." Plaintiff then went to Burgess and told him of her concern. He told her not to worry, said there was nothing to be concerned about, and that the ride was "as safe as it could be." He still did not tell her about the problems they had been having with Shamu or about the earlier incidents involving Richards and the swimsuit model. Thus reassured, plaintiff, wearing a bikini Sea World had paid for, then took three rides on Shamu. During the second ride one of the trainers noticed Shamu's tail was �luttering, a sign the animal was upset. During the third ride plaintiff fell off when Shamu refused to obey a signal. Shamu then bit her on her legs and hips and held her in the tank until she could be rescued.

Plaintiff suffered 18 to 20 wounds which required from 100 to 200 stitches and left permanent scars. She was hospitalized �ive days and out of work several weeks. She also suffered some psychological disturbance. Sea World paid all her medical expenses and continued to pay her salary as usual during this period. On advice of her counsel, she �iled this civil action and a workers' compensation claim.

When an employee's injuries are compensable under the Workers' Compensation Act, the right of the employee to recover the bene�its provided by the Act is his exclusive remedy against the employer, with exceptions not applicable here[. L]iability of the employer to pay compensation under the Act, "in lieu of any other liability whatsoever," attaches: "(b) Where, at the time of the injury, the employee is performing service growing out of and incidental to his employment and is acting within the course of his employment," and "(c) Where the injury is proximately caused by the employment, either with or without negligence."

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The undisputed evidence shows: at the time she was injured[,] plaintiff was an employee of Sea World; she was injured on the employer's premises during what were her regular working hours; she was injured while engaging in an activity which her employer had requested her to perform and for which it had provided her with the training and the means to perform; in riding Shamu the Whale for publicity pictures, plaintiff was not engaged in an activity which was personal to her, but rather one which was related to, furthered, and bene�ited the business of her employer.

Where, as here, an employee is injured on the employer's premises during regular working hours, when the injury occurs while the employee is engaged in an activity which the employer has requested her to undertake, and when the injury-causing activity is of service to the employer and bene�its the employer's business, the conditions imposing liability for compensation under are met as a matter of law, and it is immaterial that the activity causing the injury was not related to the employee's normal duties or that the circumstances surrounding the injury were unusual or unique.

Since the undisputed evidence established that plaintiff 's injuries were compensable under the Workers' Compensation Act, the trial court should have granted Sea World's motion for judgment notwithstanding the verdict. (Thereby establishing that she was 'within the scope of employment' and that she was an employee[,] thus making the only payment available to her for her injuries that of workers' compensation.)

Read the full text of the case here (http://www.lawlink.com/research/caselevel3/53160) .

Questions to Consider

1. What was the employee attempting to argue before the court and why?

2. Did she succeed? Why or why not?