CHAPTER 25 CREATING A NEGOTIABLE INSTRUMENT 593 - 612 Commercial Paper Commercial paper is a contract to pay money.

Used as: A substitute for money (must be payable on demand) A loan of money (contract to pay what is owed sometime in the future) Promissory note - a written promise to pay money UCC Article 3 - regulates commercial paper Fundamental "rule" of commercial paper: The possessor of a piece of commercial paper has an unconditional right to be paid, so long as 1. The paper is negotiable 2. It has been negotiated to the possessor 3. The possessor is a holder in due course, and 4. The issuer cannot claim any of a limited number of "real" defenses Types of negotiable instruments Two kinds of commercial paper: negotiable and non-negotiable instruments Article 3 covers only negotiable (non-negotiable instruments are governed by ordinary contract law) 2 categories of negotiable Notes and drafts A note is a promise to do something while a draft is an order to someone else to do it Note (aka promissory note) Your promise you'll pay the money Used in virtually every loan transaction Maker - the issuer of a promissory note Payee - someone who is owed money under the terms of an instrument Payable on demand - the maker must pay whenever he is asked Certificate of deposit - a note that is made by a bank (aka CD) Draft An order directing someone else to pay money for you Check - most common form of draft; an order telling a bank to pay money Drawer - person who issues a draft Drawee - one ordered by the drawer to pay money to the payee Issuer - the maker of a promissory note or the drawer of a draft Cashier's check - one that is drawn by a bank on itself All checks are drafts, but not all drafts are checks Draft is a check only if its drawn on a bank Accept - to sign a draft Trade acceptance - a draft drawn by a seller of goods on the buyer and payable to the seller or some third party Slight draft - payable on demand Time draft - payable in the future Negotiability To work as a substitute for money, commercial paper must be freely transferable in the marketplace - it must be negotiable Possessor of non-negotiable commercial papers has the same rights as the person who made the original contract With non-negotiable commercial paper, the transferee's rights are conditional because they depend upon the rights of the original party to the contract - the transferee cannot be absolutely sure what his rights are or whether he will be paid at all 1

Possessor of negotiable commercial paper has more rights than the person who made the original contract. Transferee's rights are unconditional and generally do not depend upon the rights of the original party to the contract. (Must pay the full amount even if there is an issue, but can subtract from what one owes any claims against him for breach of contract because, as the original party to the note, he cannot be a holder in due course) Requirements for negotiability An instrument is indeed negotiable if it meets the following 6 standards: 1. The instrument must be in writing. 2. The instrument must be signed by the Maker or Drawer. (any signature counts, initials, an "x", a stamp, as long as the issuer intends to indicate her signature) 3. Must contain an unconditional promise or order to pay 4. Must state a definite amount of money 5. Must be payable on demand or at a definite time 6. Must be payable to order or to bearer Order paper - an instrument that includes the words "pay to the order of" or their equivalent Bearer paper - a note is bearer paper if its made out to "bearer" or it is not made out to any specific person; can be redeemed by any holder in due course Interpretation of ambiguities UCC favors negotiability When the terms in a negotiable instrument contradict each other, these rules apply: Words take precedence over numbers Handwritten terms prevail over typed and printed terms Typed terms win over printed terms Judgment rate - the interest rate that courts use on court-ordered judgments Blasco v. Money Services Center Facts Blasco borrowed $500 from Money Services Center; payday loan; was going to repay $587.50 (17.5 interest) Before MSC could cash the check, Blasco filed for bankruptcy protection; MSC knew and still deposited the check (illegal for creditors to collect debts after bankruptcy filing, except are entitled to payment on negotiable instruments Usually checks are negotiable instruments, but only if there are for a definite amount The check: Numerical amount "$587.50" Words: "five eighty-seven and 50/100 dollars" You be the judge: Was this check a negotiable instrument? Was it for a definite amount? Argument for Blasco: For a check to be negotiable must: State a definite amount of money, which is clear within its four corners If a contradiction between the words and numbers, words take precedence over numbers Words prevail over numbers, so amount is not definite Holder can't be sure of precise amount - not a negotible instrument and MSC has no right to submit it for payment Argument for MSC: Blasco is right about words, but wrong about interpretation There was no contradiction, only ambiguity Negotiation The possessor of a piece of commercial paper has an unconditional right to be paid, as long as 1. The paper is negotiable 2. Has been negotiated to the possessor 3. The possessor is a holder in due course 2

4. The issuer cannot claim any of a limited number of real defenses Negotiation means that an instrument has been transferred to the holder by someone other than the issuer. If the issuer has transferred the instrument to the holder, then it hasn't been negotiated and the issuer can refuse to pay the holder if there was some flaw in the underlying contract To be negotiable, an instrument must be Order paper (payable to the order of someone) To be negotiated: Must first be indorsed and then delivered to the transferee Or bearer paper (payable to anyone in possession) Ex: Note made out to cash To be negotiated: simply be delivered to the transferee Indorsement - the signature of a paper/signature of the payee 3 types: 1. Blank indorsement - when you sign the check on the back without designating any particular payee; turns the check into bearer paper 2. Special indorsement - limits an instrument to one particular person 3. Restrictive indorsement - limits the check to one particular use Ex: writing for deposit only on the back of a check Holder in due course A holder in due course has an automatic right to receive payment for a negotiable instrument (unless the issuer can claim a limited number of real defenses). If the possessor of an instrument is not a holder in due course, then his right to payment depends upon the relationship between the issuer and payee. Holder in due course status increases the value of an instrument because it enhances the probability of being paid Requirements for being a holder in due course Holder in due course - holder who has given value for the instrument, in good faith, without notice of outstanding claims or other defects Holder For order paper: anyone in possession of the instrument if it's payable to or indorsed to her For bearer paper: anyone in possession Value Value - the holder has already done something in exchange for the instrument A holder in due course must give value for an instrument A promise to do something in the future is a consideration under contract law, but such a promise does not count as value under Article 3 If the holder receives an instrument in return for a promise, he does not deserve to be paid unless he performs the promise; but if he were a holder in due course, he would be entitled to payment whether he performed or not Good faith 2 tests to determine if a holder acquired an instrument in good faith; must meet both tests: Subjective test: did the holder believe the transaction was honest in fact? Objective: did the transaction appear to be commercially reasonable? Buckeye Check Cashing, Inc. v. Camp Facts October 12, James Camp agreed to provide services to Shawn Sheth by October 15; Sheth gave Camp a check for $1300 postdated October 15 On October 13, Camp sold the check to Buckeye for $1261.31. October 14, Sheth stopped payment on the check, fearing Camp would violate; also Buckeye deposited the check but didn't know of the stop payment order Trial court: Buckeye was a holder in due course, the check was valid and Sheth had to pay Buckeye; Sheth appealed 3

Issues: Was Buckeye a holder in due course? Must Sheth pay Buckeye? Judge: Honesty in fact - the absence of bad faith or dishonesty with respect to a party's conduct within a commercial transaction State of Ohio require objective test "the observance of reasonable commercial standards of fair dealing"; check cashing is an unlicensed and unregulated business in Ohio - no concrete commercial standards by which most operate Presentation of a post-dated check should put the cash-checking industry on notice the check might not be good Judgment reverse, and cause remanded Notice of outstanding claims or other defects In certain circumstances, a holder is on notice that an instrument has an outstanding claim or other defect 1. The instrument is overdue. (it's overdue the day after its due date; however not overdue if simply the interest is unpaid); any other demand instrument is overdue (1) the day after a request for payment is made or (2) a reasonable time after the instrument was issued 2. The instrument is dishonored (to refuse to pay it) 3. The instrument is altered, forged, or incomplete 4. The holder has notice of certain claims or disputes No one can qualify as a holder in due course if she is on notice that (1) someone else has a claim to the instrument or (2) there is a dispute between the original parties to the instrument. Holder in due course status is determined when the holder receives the instrument Hartford Accident & Indemnity Co. v. American Express, Co. Facts: Stratford Skalkos, manager of import/export department at Avon Products, stole $162,538.65 by altering the names of the payees (had authority to requisition checks up to $25,000) so they sounded like company names Was really paying his own bills Avon sued the recipients of the checks, demanding the funds be returned Trial Court: defendants were entitled to keep money because they were holders in due course and thus took the checks free of any claims or defenses; Avon appealed Issue: Were the defendants holders in due course? Judge: To be a holder in due course a party must take the instrument "without notice that it's overdue or has been dishonored or of any defense against a claim to it on the part of any person" Avon: defendants took the checks from Skalkos with notice of Avon's claim (Avon had not authorized defendants to apply its funds to Skalko's personal indebtedness) Minor errors or misspellings were not irregularities of such magnitude as to put a holder on notice that something was wrong Defendants indicated they regularly receive payment through corporate accounts for goods or services furnished to individuals Parties who take commercial paper for value are not bound at their peril to be upon the alert for circumstances which might possibly excite the suspicions of wary vigilance Defendants did not have notice of Avon's claim under UCC section 3-304 Avon was the party best able to prevent the loses and to protect itself by insurance Order of appellate division: dismissing the complaint - affirmed, with costs Shelter Rule

Under the shelter rule, the transferor of an instrument passes on all of his rights. When a holder in due course transfers an instrument, the recipient acquires all the same rights even if she is not a holder in due course herself. One exception: if a holder in due course transfers the instrument back to a prior holder who was a party to fraud involving the instrument, that prior holder does not acquire the rights of a holder in due course Defenses against a holder in due course Real and personal defenses are valid against an ordinary holder; only real defenses can be used against a holder in due course Real defenses Valid against both a holder and a holder in due course Forgery Bankruptcy Being underage Alteration If the amount of an instrument is wrongfully changed, the holder in due course can collect only the original (contract) amount If the instrument was incomplete, the holder in due course can collect the full face amount, even if the instrument was incorrectly filled in Duress, mental incapacity, or illegality Fraud in the execution Issuer has been tricked into signing without knowing what the instrument is and without any reasonable way to find out Personal defenses Valid against a holder, but not against a holder in due course Typically have some connection to the initial transaction in which the instrument was issued Breach of contract Lack of consideration Prior payment Unauthorized completion Fraud in the inducement Note: fraud in the execution (real defense) has a different result from fraud in the inducement (personal defense) Non-delivery Claims in recoupment The issuer subtracts (i.e., sets off) any other claims he has against the initial payee from the amount he owes on the instrument ~I'm not going to pay the full amount of the instrument because she owes me money for something else (defense - I'm not going to pay the full amount of the instrument because there is some problem with the instrument itself or the underlying deal on which the instrument is based A claim in recoupment is valid against a holder but not against a holder in due course Consumer exception Consumer credit contract - one in which a consumer borrows money from a lender to purchase goods and services from a seller who is affiliated with the lender FTC requires all promisory notes in consumer credit contracts to contain: Notice. Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained with the proceeds hereof. Under the UCC, no one can be a holder in due course of an instrument with this language Antuna v. Nescor, Inc. Facts: 5

Steven Vlohotis, a salesman for NESCOR - a home improvement company - convinced the Antunas to sign a consumer credit contract with them to install vinyl siding and windows Contract - Antunas would pay for the improvements in installments NESCOR assigned contract to First Consumer Credit, who reassigned to The Money Store (TMS) Had the FTC language Connecticut - "no home improvement contract shall be valid or enforceable against an owner unless it's entered into by a registered salesman or a registered contractor; Vlohotis was not registered Antunas unhappy with work, so stopped making payments, TMS filed suit Antunas moves for summary judgment, you're not a holder in due course Issues: Does TMS have the right to foreclose on the Antunas' home? Was TMS a holder in due course? Judge: NESCOR noncompliance renders the home improvement contract invalid and unenforceable and precludes it from enforcing the consumer credit contract against the plaintiffs

CHAPTER 26 LIABILITY FOR NEGOTIABLE INSTRUMENTS Introduction The issuer of a negotiable instrument is liable to a holder in due course, unless the issuer can assert one of a limited number of real defenses An issuer can assert both personal and real defenses against a mere holder Signature liability - liability of someone who signs an instrument Warranty liability - liability of someone who receives payment on an instrument The contract versus the instrument Instruments create a second contract to pay the debt created by the first agreement Once an instrument has been accepted in payment for a debt, the debt is suspended until the instrument is paid or dishonored Enforcing an instrument (Instrument --Negotiated--> Holder ---Claim for Payment --> --> No Defense ---> Payment Or --> Defenses --> No Payment A holder is someone in possession of an instrument that has been validly negotiated Real and personal defenses can be used against a holder Who has the right to demand payment on an instrument? A holder against whom no defenses can be used. Primary versus secondary liability Primary liability - unconditional liability - must pay unless he has a valid defense Secondary liability - must pay only if the person with primary liability does not Holder of an instrument must first ask for payment from those who are primarily liable before making demand against anyone who is only secondarily liable The payment process Comprises as many as 3 steps: Presentment Means the holder of the instrument demands payment from someone who is obligated to pay it (such as the maker or drawee) To present, the holder must 1. Exhibit the instrument 2. Show ID 3. Surrender the instrument (if paid in full) or give a receipt (if only partially paid) Dishonor Instrument is past due, but the maker (of a note) or the drawee (of a draft) refuses to pay Notice of dishonor 6

Holder of the instrument notifies those who are secondarily liable that the instrument has been dishonored Can be given by any reasonable means, including oral, written, or electronic communication Must be giving with 30 days of the dishonor (except in the case of banks, which must give notice by midnight of the next banking day) Must simply identify the instrument and indicate that it has been dishonored Signature Liability Liability depends upon the capacity in which it was signed; different for maker, indorser, guarantor, etc. Location on check, assume: Issuer - lower right-hand corner Acceptor - signs on face of check Indorser - signs the back of an instrument Maker Maker - the issuer of a note Primarily liable Must pay unless he has a valid defense If two makers sign a note, they are jointly and severally liable Holder can demand full payment from either or partial payment from both Drawer Most common form of draft - a check Drawer - person who writes the check Has secondary liability Not liable until he has received notice that the bank has dishonored the check Drawee Drawee - bank on which a check is drawn The bank is not liable to the holder and owes no damages to the holder for refusing to pay the check. Bank must be liable to the drawer for violating their checking account agreement, but this contract doesn't extend to the holder of the check. When a holder presents a check, the bank can do one of the following: Pay the check - the holder has no complaints Dishonor the check - the holder must pursue remedies against the drawer Certified check - a check that the issuer's bank has signed, indicating its acceptance of the check Bank then becomes primarily liable Cashier's check - drawn on the bank itself and is a promise that the bank will pay out of its own funds Harrington v. MacNab Facts MacNabs purchased property from Harrington's client MacNabs had a personal check for $150,128.70; not certified Harrington called Merrill Lynch and was told there were sufficient funds in the account and that she would put a hold on the account in the amount of the check To confirm the promise in writing, Merrill Lynch faxed "This letter is to verify that the funds are available in the Merrill Lynch account. There is a pend on the funds for the check that was given you." MacNab's account did not contain sufficient cleared funds to cover check; MacNab's kept promising but never made good; Harrington paid his clients the amount owed and then sued MacNab's; sought recovery from Merrill Lynch Issue: Is Merrill Lynch liable to Harrington as the drawee of the check? Judge: No contractual privity or its equivalent between Mr. Harrington and Merrill Lynch, which was in a position equivalent to that of the drawee on the MacNab's check To hold that an "intimate nexus" relationship existed in this case would lead to the result that any payee on a check who makes inquiry is in the equivalent of contractual privity with the drawee, a 7

proposition that would place substantial and potentially unlimited liability on drawees for uncertified checks, in contravention of the basic policies underlying the checking system in the US A drawee has no contract liability on a check to a payee unless and until it has accepted the check, viz, certified it Granted Merrill Lynch motion for summary judgment Indorser Indorser - anyone, other than an issuer or acceptor, who signs an instrument Indorsers are secondarily liable; must pay if the issuer does not; only liable to those who come after them in the chain of ownership, not to those who held the instrument beforehand Exceptions; indorsers are not liable if: 1. They write the words "without recourse" next to their signature on the instrument" 2. A bank certifies the check 3. The check is presented for payment more than 30 days after the indorsement, or 4. The check is dishonored and the indorser is not notified within 30 days Accommodation party Accommodation party - someone, other than the issuer, acceptor, or indorser - who adds her signature to an instrument for the purpose of being liable on it Typically receives no direct benefit from the instrument but is acting for the benefit of the accommodated party Accommodated party - someone who receives a benefit from an accommodation party Accommodation party can sign for an issuer, acceptor, or indorser; anyone who signs an instrument is deemed to be an accommodation party unless it is clear that he is an issuer, acceptor, or indorser An accommodation party has the same liability to the holder as the person for whom he signed; holder can make a claim directly against the accommodation party without first demanding payment from the accommodated party Accommodation party is liable only to the holder, not to the other maker In Re Couchot Facts: Kathy J. Couchot and her mother-in-law Jean Couchot, borrowed $6,317.8 from Star Bank to pay for her husband's funeral Jean executed a note and Kathy signed as an accommodation party Star Bank issued a check payable to Kathy and Jean Couchot; somehow was altered to read Kathy or Jean Couchot Jean cashed the check and use the money to pay funeral expenses and some of Kathy's back taxes and insurance premiums Jean didn't repay the loan to the bank Kathy made 6 payments before defaulting Issue: Is an accommodation party liable for the full amount of a note when she received only a small portion of the proceeds? Is an accommodation party liable even though the check was altered? Judge: Consideration doesn't have to be received by an accommodation party to support her obligation While the check was materially altered, there is absolutely no evidence that the check was fraudulently altered Ordered to pay the note Agent To avoid personal liability when signing an instrument, an agent must (1) indicate that she is signing as an agent and (2) give the name of the principal An agent who fails follow these two steps will be personally liable on the instrument to any holder in the due course who did not know the agent was acting for someone else Will not be liable to holders who are not in due course if she can prove that the original parties did not intend for her to be liable 8

The principal is liable if the agent signs correctly, the agent signs just her own name, or the agent signs only the name of the principal An agent is authorized to sign a check on the principal's bank account, the agent is not personally liable even if she forgets to indicate that she is simply an agent Warranty Liability Apply when someone receives payment on an instrument that is invalid because it has been forged, altered, or stolen Basic rules of warranty liability 1. The wrongdoer is always liable (If a forger signs someone else's name to an instrument, that signature counts as the forger's , not as that of the person who name she signed. The forger is liable for the value of the instrument plus any other expenses or lost interest that subsequent parties may experience because of the forgery 2. The drawee bank is liable if it pays a check on which the drawer's name if forged. The bank can recover from the payee only if the payee had reason to suspect the forgery. 3. In any other case of wrongdoing, a person who first acquires an instrument from a wrongdoer is ultimately liable to anyone else who pays value for it. (Rules are based on the provisions in Article 3 of the UCC) Transfer Warranties When someone transfers an instrument, she warrants that: She is a holder of the instrument (in other words, she is a legitimate owner) All signatures are authentic and authorized The instrument has not been altered No defense can be asserted against her As far as we know, the issuer is solvent When someone violates the transfer warranties, she is liable for the value of the instrument, plus expenses and interest Transfer warranties flow to all subsequent holders in good faith who have indorsed the instrument If the instrument is bearer paper, the transfer warranties extend only to the first transferee. If a warranty claim is not made within 30 days of discovering the breach, damages are reduced by the amount of harm that the delay caused. Transfer warranties apply only if the instrument has been transferred for consideration. Quimby v. Bank of America Facts: Steve Szabo, Venezuelan resident, had a checking account with BofA in Florida Someone in Nigeria hacked into his online account, called the bank's customer service department, changed the telephone number listed on the account, and order blank checks Someone wrote a check from Szabo's account for $120,000 to pay for an investment in Freddie Quimby's gold mine On February 20, Quimby presented the check for payment at BofA branch in Idaho; had branch manager verify through BofA records that Szabo's account had sufficient funds to cover; called the number listed to verify the check was valid Quimby indorsed check to the bank and received a cashier's check Fake Szabo said he changed his mind about the investment and wanted money back; February 22, Quimby wired $111,000 from his account to one in Hong Kong; funds disappeared and BofA has been unable to reclaim them March 3, real Szabo reported to the bank that his signature on the Quimby check was a forgery; bank repaid Szabo and then filed suit against Quimby, seeking repayment on the cashier's check it had issue to him, with interest Bank argued that Quimby had violated his transfer warranties when he indorsed the forged check to it Issue: Did Quimby violate his transfer warranties? Is he liable to the BofA for $120,000 Argument for Bank: 9

When Quimby indorsed the check to the bank, he warranted that all signatures were authentic and authorized; not true as signature was a forgery and check was invalid - waited only two days before wiring the funds; if he had waited longer, the fraud might have been discovered in time Argument for Quimby Bank (1) permitted a thief to hack into Szabo's account; (2) issued blank checks to the thief; (3) assured Quimby that there were good funds to pay the check; (4) issued a cashier's check to Quimby; and (5) wired funds to Hong Kong that it cannot trace Bank was negligent Comparison of signature liability and transfer warranties Transfer warranties fill in holes left by the signature liability rules: A forged signature is invalid and therefore creates no signature liability on the party of the person whose name was signed; however, someone who receives a forged instrument may recover under transfer warranty rules, which provide that anyone who transfers a forged instrument is liable for it The signature liability rules do not apply to the transfer of bearer paper. Bearer paper can be negotiated simply by delivery; no indorsement is required. No signature means no signature liability (for anyone other than the issuer - who is the only person actually signing the instrument). Transfer warranties apply to each transfer of bearer paper (although the transferor of bearer paper is liable only to the person to whom he gives the instrument, not to any transferees further down the line Under the signature liability rules, the holder of an instrument cannot make a claim until the indorser or drawer has been notified that the instrument was presented and dishonored. Under the transfer warranty rules, the holder need not wait for presentment or dishonor before making a claim against the transferor. Presentment warranties Presentment warranties - apply to someone who demands payment for an instrument from the maker, drawee, or anyone else liable on it Apply when the instrument returns to the maker or drawee for payment Anyone who presents a check for payment warrants that; if any of these promises is untrue, the bank has a right to demand a refund from the presenter: She is a holder The check has not been altered, and She has not reason to believe the drawer's signature is forged Anyone who presents a promissory note for payment makes only one warranty - that he is a holder of the instrument The presenter of a note warrants that he is a holder A forged signature prevents subsequent owners from being a holder, so anyone who presents a note with a forged signature is violating the presentment warranties Other liability rules Conversion liability Conversion (1) someone has stolen an instrument or (2) a bank has paid a check that has a forged indorsement Rightful owner of the instrument can recover from either the thief or the bank Imposter rule If someone issues an instrument to an imposter, then any indorsement in the name of the payee is valid as long as the person (a bank, say) who pays the instrument does not know of the fraud Fictitious payee rule If someone issues a instrument to a person who does not exist, then any indorsement in the name of the payee is valid as long as the person (a bank, say) who pays the instrument does not know of the fraud. Imposter rule applies if you give a check with a real name to the wrong person Fictitious payee rule applies if you write a check to someone who does not exist Employee indorsement rule 10

If an employee with responsibility for issuing instruments forges a check or other instrument, then any indorsement in the name of the payee, or a similar name, is valid as long as the person (a bank, say) who pays the instrument does not know of the fraud Single forgery - the employee writes a check to himself, signs his employer's name, and cashes the check In a double forgery, the employee writes a check to someone else, forges his employer's name, and also forges the name of the payee Negligence Anyone who behaves negligently in creating or paying an unauthorized instrument is liable to an innocent third party; if two people are negligent, they share the loss according to their negligence Anyone who is careless in paying an unauthorized instrument is liable, despite the three rules Anyone who is careless in allowing a forged or altered instrument to be created is also liable, whether or not he has violated one of the three rules Gulf States Section, PGA, Inc. v. Whitney National Bank of New Orleans Facts Robert Brown, executive director of Gulf States Section of the PGA, was responsible for paying bills and handling the bank account; used Quicken, software program, checks were kept in a box beneath the printer stand in his office Adrenetti Collins was a secretary; forged 18 checks totaling $22,699.81; intercepted two of the bank statements sent by the Bank and replaced them with forged statements that left out the checks she had stolen The usual Whitney statement was on vanilla-colored paper measuring a non-standard 6 3/4 x 11 inches; forged documents were on standard 8.5 x 11 white paper Collins asked for a leave of absence Whitney policy was to verify signatures on check equal to or greater than $5000; one check was for $5000 but was not verified Brown's signature was a letter or two and loop Issue: Is Whitney liable to the PGA for the forged checks it paid? Argument for PGA: Brown's signature did not appear on these checks, so only the bank is liable on them Brown traveled extensively and wasn't available to supervise the office staff carefully - all companies do this Whitney admits to not verifying the checks $5000 and over Argument for Whitney: Banks are liable unless it can show that (1) customer was negligent; (2) the negligence substantially contributed to the forgery; (3) the bank paid the forged instruments in accordance with reasonable commercial banking industry standards PGA was clearly negligent; checks should have been locked up, not sitting under the printer in an open box Forged signature was close enough to the sloppy original Crimes Bouncing a check Illegal to write a check on an account that has insufficient funds Check kiting Moving funds between bank account to take advantage of the float Forgery Utter - to pass on an instrument that one knows to be forged Discharge Discharge of the obligor Discharge - liability on an instrument terminates Article 3 established 5 ways to discharge an instrument By payment 11

As long as the payment is from someone obliged to pay and goes to the holder By agreement Can agree to discharge, even if the instrument is not paid; must be in writing By cancellation The intentional, voluntary surrender, destruction, or disfigurement of an instrument By certification When a bank certifies or accepts a check, the drawer and all indorsers of the check are discharged, and only the bank is liable By alteration If terms are intentionally changed No discharge is effective against a holder in due course who acquires the instrument without knowledge of the discharge Discharge of an indorser of accommodation party Article 3 provides that virtually any change in an instrument that harms an indorser or accommodation party also discharges them unless they consent to the change. Chapter Conclusion It is never wise to pay an important game without understanding the rules

CHAPTER 24 SECURED TRANSACTIONS 558 - 587 Article 9: Terms and Scope Article 9 of the UCC governs secured transactions in personal property Article 9 Vocabulary Fixtures - goods that have become attached to real estate Security interest - an interest in personal property or fixtures that secures the performance of some obligation Secured party - the person or company that holds the security interest Collateral is the property subject to a security interest Debtor- a person who has some original ownership interest in the collateral; Having a security interest in the collateral does not make one a debtor. Obligor - a person who must repay money, or perform some other task Security agreement - the contract in which the debtor gives a security interest to the secured party; protects the secured partys rights in the collateral Default - occurs when the debtor fails to pay money that is due; also includes other failures by the debtor, such as failing to keep the collateral insured Repossession occurs when the secured party takes back collateral because the debtor has defaulted. Typically, the secured party will demand that the debtor deliver the collateral; if the debtor fails to do so, the secured party may find the collateral and take it. Repossession - occurs when the secured party takes back collateral because the debtor has defaulted. Perfection - a series of steps the secured party must take to protect its rights in the collateral against people other than the debtor. This is important because if the debtor cannot pay his debts, several creditors may attempt to seize the collateral, but only one may actually obtain it. To perfect its rights in the collateral, the secured party will typically file specific papers with a state agency. Financing statement -a document that the secured party files to give the general public notice that it has a secured interest in the collateral 12

Record - information written on paper or stored in an electronic or other medium. Authenticate - to sign a document or to use any symbol or encryption method that identifies the person and clearly indicates she is adopting the record as her own Scope of Article 9 Applies to any transaction intended to create a security interest in personal property or fixtures Types of Collateral Instruments - Drafts, checks, certificates of deposit, and notes may all be used as collateral, as may stocks, bonds, and other securities Investment property - refers primarily to securities and related rights. Documents of title -papers used by an owner of goods who ships or stores them. The documents are the owners proof that he owns goods no longer in his possession Account - a right to receive payment for goods sold or leased Deposit accounts - security interests in deposit accounts (money placed in banks) Commercial tort claims - An organization that has filed a tort suit may use its claim as collateral. Personal injuries to individuals are not covered General intangibles - This is a residual category, designed to include many kinds of collateral that do not appear elsewhere on the list, such as copyrights, patents, trademarks, goodwill, and the right to payment of some loans. Chattel paper - a record that indicates two things: (1) an obligor owes money and (2) a secured party has a security interest in specific goods Most commonly occurs in a consumer sale on credit The same chattel paper may be collateral for a second security interest Electronic chattel paper is the same thing, except that it is an electronic record rather than a written one Goods - movable things, including fixtures, crops, and manufactured homes For purposes of secured transactions, the Code divides goods into additional categories. In some cases, the rights of the parties will depend upon what category the goods fall into. These are the key categories: Consumer goods are those used primarily for personal, family, or household purposes Farm products are crops, livestock, or supplies used directly in farming operations (as opposed to the business aspects of farming). Inventory consists of goods held by someone for sale or lease, such as all of the beds and chairs in a furniture store. Equipment refers to things used in running a business, such as the desks, telephones, and computers needed to operate a retail store. Software Distinguishes software from goods A program embedded in a computer counts as goods if it is customarily considered part of those goods or if, by purchasing the goods, the owner acquires the right to use the program. A program that does not meet those criteria is termed software, and will be treated differently for some purposes. Attachment of a security interest Attachment - the secured party has taken all of the following steps to create an enforceable security interest The two parties made a security agreement, and either the debtor has authenticated a security agreement describing the collateral or the secured party has obtained possession or control; The secured party has given value to obtain the security agreement; and The debtor has rights in the collateral. Agreement Without an agreement, there can be no security interest 13

Generally, will be in writing and signed by the debtor or electronically recorded and authenticated by the debtor The agreement must reasonably identify the collateral. A description of collateral by type is often acceptable. Control and possessions the security agreement need not be in writing if the parties have an oral agreement and the secured party has either control or possession. Control For deposit accounts, electronic chattel paper and certain other collateral, the security interest attaches if the secured party has control. In a general sense, control means that the secured party has certain exclusive rights to dispose of the collateral. Deposit account (in a bank). The secured party has control if it is itself the bank holding the deposit or if the debtor has authorized the bank to dispose of funds according to the secured partys instructions. Electronic chattel paper - A secured party has control of electronic chattel paper when it possesses the only authoritative copy of it, and the record(s) designate the secured party as the assignee. Investment property and letter-of-credit rights - The Code specifies analogous methods of controlling investment properties and letter-of-credit rights Possessions For most other forms of collateral, including goods, securities, and most other items, a security interest attaches if the secured party has possession. In Re CFLC, Inc. Facts: Expeditors, a freight company that supervised importing/exporting for Everex Systems Expeditors frequently had possession of Everex's goods During 17 month period, Expeditors sent over 300 invoices to Everex; all said customer either had to accept all of the invoice's terms or to pay cash, receiving no work on credit; gave Expeditors a general lien on all of the customer's property in its possession Everex filed for bankruptcy Expeditors expedited its way into court proceedings, claiming right to sell Everex's goods worth about $81,000 Trial judge rejected the claim, ruling Expeditors lacked valid security interest Issue: Did Expeditors have a security interest in Everex's goods? Decision: Doing business for 1.5 years; never discussed the terms of the invoice nor negotiated for a security interest Everex never expressly acknowledged the invoice terms by accepting or objecting to them, nor did it take actions which acknowledged Expeditors' alleged general lien on the goods; only pertinent acts were its payment of the invoices and silence as to the added terms Evidence consisting of Everex's receipt and payment of invoices containing terms for a general lien in the goods in favor of Expeditors did not amount to an agreement for such a security interest, pursuant to [revised section 9-102] Repetitive sending by Expeditors to Everex of terms which expeditors wished to be made part of the oral contract was not evidence of course of dealing because an agreement did not exist as to the security interest which could be supplemented by such evidence Affirmed Value For security interest to attach, the secured party must give value Future value 14

Parties may also agree that some of the value will be given in the future Debtor rights in the collateral The debtor can grant a security interest in goods only if he has some legal right to those goods himself. Typically, the debtor owns the goods. But a debtor may also give a security interest if he is leasing the goods or even if he is a bailee, meaning that he is lawfully holding them for someone else. Once the security interest has attached to the collateral, the secured party is protected against the debtor. If the debtor fails to pay, the secured party may repossess the collateral. Attachment to Future Property The security agreement may specify that the security interest attaches to personal property that the debtor does not yet possess but might obtain in the future. After-Acquired Property After-acquired property refers to items that the debtor obtains after the parties have made their security agreement. The parties may agree that the security interest attaches to after-acquired property. Proceeds Proceeds are whatever is obtained by a debtor who sells the collateral or otherwise disposes of it. The secured party automatically obtains a security interest in the proceeds of the collateral, unless the security agreement states otherwise. Perfection Nothing less than perfection Once the security interest has attached to the collateral, the secured party is protected against the debtor, but it may not be protected against anyone else. There are several kinds of perfection: Perfection by filing Perfection by possession Perfection of consumer goods Perfection of movable collateral and fixtures Perfection by Filing The most common way to perfect an interest is by filing a financing statement with one or more state agencies A financing statement gives the names of all parties, describes the collateral, and outlines the security interest, enabling any interested person to learn about it. If the collateral is either accounts or general intangibles, filing is the only way to perfect. Contents of the financing statement A financing statement is sufficient if it provides the name of the debtor, the name of the secured party, and an indication of the collateral The name of the debtor is critical because that is what an interested person will use to search among the millions of other financing statements on file. a financing statement is effective if a computer search run under the debtors correct name produces it. Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc. Facts: Corona leased farmland to a strawberry farmed Armando Munoz Juarez; signed the lease Armando Munoz Corona advanced $ for payroll and farm production expenses; filed a UCC-1 financing statement, claiming security interest in the strawberry crop Financing statement listed debtor's name as "Armando Munoz" 6 months later, Armando Munoz Juarez contracted with Frozsun Foods, Inc to sell processed strawberries Frozsun advanced money and filed financing statement listed debtor as Armando Juarez 15

By the next year, strawberry farmed owed Corona $230,000 and Frozsun $19,600; when he was unable to make payment on Corona's loan, the company repossessed the farmland and strawberries Both Corona and Frozsunc claimed proceeds of the crop Trial court awarded money to Frozsun, finding Coronoa filed its statement under wrong last name and therefore failed to perfec its security interest Issue: Did coronoa correctly file its financing statement? Decision: No evidence was presented that the financing statement would have been discovered under debtor's true legal name, using the filing office' standard search logic Wrong debtor name in appellants' financing statement was seriously misleading Appellants: Mexican convention of using father's last name, then mother's last name; but debot'rs last name did not change when he crossed the border Appelants knew the debtor's legal last name Appellants are defeated by their own pleadings Affirmed Article 9-2010 Amendments states will require that for individuals, the name on a financing statement be the same as that on a persons drivers license. Debtor's signature Notice one important item that is not required on a financing statement: the debtors signature Place of filing A secured party must file in the state of the debtors location. An individual is located at his principal residence. Article 9 prescribes central filing within the state for most types of collateral. For goods, the central location will typically be the Secretary of States office, although a state may designate some other office if it wishes. For fixtures, the secured party generally has a choice between filing in the same central office that is used for goods (which, again, is usually the Secretary of States office), or filing in the local county office that would be used to file real estate mortgages Duration of filing Once filed, effective for five years After five years, the statement will expire and leave the secured party unprotected, unless she files a continuation statement within six months prior to expiration. The continuation statement is valid for an additional five years, and if necessary, a secured party may continue to file one periodically, forever Perfection by Possession or Control Pledge - a secured transaction in which a debtor gives collateral to the secured party Possession When may a party use possession? Whenever the collateral is goods, negotiable documents, Instruments, money, chattel paper that is tangible (as opposed to electronic), or most securities Advantages Notice to other parties is very effective Possession enables the creditor to ensure that the collateral will not be damaged during the life of the security interest If the debtor defaults, a secured party has no difficulties repossessing goods that it already holds For some collateral, possession is impractical Mandatory possession A party must perfect a security interest in money by taking possession Control A security interest in investment property, deposit accounts, letter-of-credit rights, and electronic chattel paper may be perfected by control. Control means that the secured pary has certain exclusive rights to dispose of the collateral 16

Mandatory control Security interests in deposit accounts and letter-of-credit rights may be perfected only by control Care of the collateral Possession and control give several advantages to the secured party, but also one important duty: a secured party must use reasonable care in the custody and preservation of collateral in her possession or control reasonable care in the custody and preservation of collateral If the collateral is something tangible, such as a painting, the secured party must take reasonable steps to ensure that it is safe from harm. Layne v. Bank One Facts: Charles E. Johnson, founder and CEO of PurchasePro.com, Inc. and Geoff Layne was the marketing director When their internet stock went public, both officers suddenly owned shares worth millions of dollars; to increase liquidty, Johnson took out a loan for $2.8M and Layne borrowed $3.25M Each secured the loan with shares of purchasePro stock Loan agreement required a loan-to-value (LTV) ratio of 50%, meaning the value of the shares had to be at least double the outstanding loan balance; if value of shares sank below the required level, two men could either pay off some of the loan or offer additional security; if two failed to remedy the problem, bank was entitled (but not obligated) to sell the shares; Johnson secured his loan with $6.9M worth of PP stock In February, Internet stocks plummeted, and both loans immediately exceeded their LTV ratio; Johnson and Layne spoke with the bank saying they'd offer more collateral In March and April, more calls went back and forth, debtors occasionally suggesting that the collateral be sold, while at other times agreeing to provide more security In july, over a 4-day period, the bank sold Johnson's shares for $524,757, less than 10% of its original worth Two filed suit against the bank claiming it failed to exercise reasonable care of the collateral Trial court gave judgment for bank Issue: did the bank exercise reasonable care of the shares? Decision: UCC states that " a secured party shall use reasonable care in the custody and preservation of collateral in the secured party's possession. In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed" The comment to 9-207 states that the provision imposes a duty of care, similar to that imposed on a pledgee at common law, on a secured party in possession of collateral, and cites to [a different treatise that says,] The pledgee is not liable for a decline in the value of pledged instruments, even if timely action could have prevented such decline. In the context of pledged stock, courts have used this language to hold that a bank has no duty to its borrower to sell collateral stock of declining value. Another court stated, It is the borrower who makes the investment decision to purchase stock. A lender in these situations merely accepts the stock as collateral, and does not thereby itself invest in the issuing firm. Given the volatility of the stock market, a requirement that a secured party sell shares held as collateral, at a particular time, would be to shift the investment risk from the borrower to the lender. A lender has no obligation to sell pledged stock held as collateral merely because of a market decline. If the borrower is concerned with the decline in the share value, it is his responsibility, rather than that of the lender, to take appropriate remedial steps, such as paying off the loan in 17

return for the collateral, substituting the pledged stock with other equally valued assets, or selling the pledged stock himself and paying off the loan. Perfection of Consumer Goods The UCC gives special treatment to security interests in most consumer goods Purchase money security interest (PMSI) - one taken by the person who sells the collateral or by the person who advances money so the debtor can buy the collateral PMSI in consumer goods perfects automatically, without filing Perfection of Movable Collateral and Fixtures Movable Goods Generally For most collateral, when the debtor moves to a new state, a security interest from the old state remains perfected for four months; when the collateral is transferred to a new state, the security interest remains perfected for one year. If the secured party re-perfects in the new State within the time limits mentioned, the security interest remains valid until it would normally expire. If the secured party fails to re-perfect in the new state, the security interest lapses. Motor Vehicles and the Like Motor Vehicles and the Like The UCCs provisions about perfecting generally do not apply to motor vehicles, trailers, mobile homes, boats, or farm tractors State title laws generally require that a security interest in an automobile be noted directly on the vehicles certificate of title. Fixtures Goods that have become attached to real estate A security interest may be created in goods that are fixtures and may continue in goods that become fixtures; UCC does not permit a security interest in ordinary building materials, such as lumber and concrete, once they become part of a construction project Common disputes concern: The status of the personal property when the security interest was created (was it still goods, or had it already been attached to real estate and become a fixture?); The status of the real estate (does the debtor also have a legal interest in the real property?); The type of perfection (which was recorded first, the security interest in the fixture or the real estate? does the secured party hold a PMSI?); and The physical status of the fixture (can it be removed without damaging the real estate?) Protection of Buyers Generally, once a security interest is perfected, it remains effective regardless of whether the collateral is sold, exchanged, or transferred in some other way. Buyers in Ordinary Course of Business BIOC - someone who buys goods in good faith from a seller who routinely deals in such goods A buyer in ordinary course of business takes the goods free of a security interest created by its seller even though the security interest is perfected The BIOC exception is designed to encourage ordinary commerce. A buyer making routine purchases should not be forced to perform a financing check before buying. Conseco Finance Servicing Corp. v. Lee Facts: Lila Williams bought a new Roadtrek 200 motor home form New World R.V. Inc; paid about 14,000 down and financed $63,000, giving a security interest to New World RV company assigned its security interest to Conseco Finance, which perfected 2 years later, Williams returned the vehicle to New World and NW sold the RV to Robert and Ann Lee for $42,800; year later, Williams defaulted on her payments to Conseco 18

The Lees sued Conseco claiming to be BIOCs and asking for a court declaration that they had sole title to the Roadtrek; Conseco counterclaimed, seeking titel based on its perfectly security interest; trial court ruled Lees were BIOCs with full rights to the vehicle Conseco appealed Issue: Were the Lees BIOCs Argument for Conseco Under UCC 9-319 a BIOC takes free of a security interest created by the buyer's seller; buyers were Lees, seller was New World; NW didn't create the security interest - Lila Williams did; no security interest created by NW; security interest held by Conseco was created by someone else (williams) and is not affected by the Lees' status as BIOC Argument for the Lees: Conseco is really saying that two honest buyers, acting in good faith, can walk into an RV dealership, spend $42,000 for a used vehicle and end up with nothing Rebuttal from Conseco NW which knew that Williams financed the Rv and knew who held the security interest, never bothered to check on the status of the payments; if the Lees have suffered wrongdoing, it is at the hands of an irresponsible seller - the company they chose to work with, the company from whom they must seek relief Rebuttal from the Lees Purpose of the UC is to make dealing fair and commerce work; one of its methods is to get away from obscure , technical arguments; what buyers will ever pay serious money - any oney- for a used vehicle, knowing that thousands of dollars later, the car might be towed out of their driveway by a finance company they never heard of Buyers of consumer goods In the case of consumer goods purchased from a debtor-seller, a buyer takes free of a security interest if he is not aware of the security interest, he pays value for the goods, he is buying for his own family or household use, and the second party has not yet filed a financing statement. Buyers of Chattel Paper, Instruments, and Documents A buyer who purchases chattel paper or an instrument in the ordinary course of her business and then takes possession generally takes free of any security interest Other paper Similar rules apply for holders in due course of instruments and for purchasers of securities and documents of title Liens Lien - a security interest created by law, rather than by agreement Artisan's lien - a security interest in personal property Mechanic's lien - a security created when a worker improves real property Landlord's lien Priorities among creditors The party who has priority in the collateral gets it 3 principal rules 1st rule: a party with a perfected security interest takes priority over a party with an unperfected interest 2nd rule: if neither secured party has perfected, the first interest to attach gets priority 3rd rule: between perfected security interests, the first to file or perfect wins Filing versus control of possession A secured party may use either filing or control to perfect its security interest in deposit accounts, investment property, and letter-of-credit rights. The secured party should use control For these three types of collateral, a secured party who has control wins over a party who merely filed. 19

a secured party may perfect its interest in an instrument either by filing or possession. Once again, possession is the better idea: between competing secured parties, the one who possesses wins, even over one who filed earlier. Priority Involving a Purchase Money Security Interest You may recall that a purchase money security interest (PMSI) is a security interest taken by the seller of the collateral or by a lender whose loan enables the debtor to buy the collateral. A PMSI can be created only in goods, fixtures, and software. Parties holding a PMSI often take priority over other perfected security interests in the same goods, even if the other security interest was perfected first. Inventory - goods that a seller is holding for sale or lease in the ordinary course of its business PMSI in inventory Takes priority over a conflicting perfected security interest (even one perfected earlier) if 2 conditions are met: Before filing its PMSI, the secured party must check for earlier security interests and, if there are any, must notify the holder of that interest concerning the new PMSI; and The secured party must then perfect its PMSI (normally by filing) before the debtor receives the inventory. PMSI in Noninventory Collateral A PMSI in collateral other than inventory takes priority over a conflicting security interest if the PMSI is perfected at the time the debtor receives the collateral or within 20 days after he receives it In Re Roser Facts: Robert Roser obtained a loan from Sovereign which he used for a car 19 days later, Sovereign filed a lien with the state of Colorado; bank expected that with a perfected interest, it would have a priority over everyone else Unknown to sovereign bank, Roser had declared bankruptcy only 12 days after he purchased the car Bankruptcy trustee argued that he had priority over Sovereign because the bankruptcy filing happened before Sovereign perfected its security interest Soverign appealed Issue: Did Sovereign Bank, a PMSI holder, obtain priority over the bankruptcy trustee? Decision: Bankruptcy Code gives bankruptcy trustee the rights and powers of a person who acquired a judicial lien on the debtor's property at the time that the bankruptcy petition was filed Trustee can avoid liens that are unperfected when the petition for bankruptcy is filed Bank presents a straightforward argument why its lien would have priority under Colorado law over a lien of a judgment creditor who obtained judgment at the time Rose filed for bankruptcy No doubt the Bank satisfied the requirements of this section Filing of a lien constitutes the filing of a financing statement; Nor is there any dispute that the Bank held a purchase-money security interest in Roser's vehicle; because the bank filed its lien within 20 days of Roser's obtaining the vehicle, It contends that the UCC gives its lien a priority over any rights in the vehicle - including the Trustee's interest Trustee's arguments to the contrary are not persuasive; cannot avoid the Bank's lien We REVERSE judgment of the district court and REMAND for further proceedings consistent with this opinion Default and Termination Default Generally, a debtor defaults when he fails to make payments due or enters bankruptcy proceedings. The parties can agree that other acts will constitute default, such as the debtors failure to maintain insurance on the 20

collateral. When a debtor defaults, the secured party has two principal options: (1) it may take possession of the collateral, or (2) it may file suit against the debtor for the money owed. The secured party does not have to choose between these two remedies; it may try one remedy, such as repossession, and if that fails, attempt the other Taking Possession of the Collateral When the debtor defaults, the secured party may take possession of the collateral. How does the secured party accomplish this? In either of two ways: the secured party may act on its own, without any court order, and simply take the collateral, provided this can be done without a breach of the peace. Otherwise, the secured party must file suit against the debtor and request that the court order the debtor to deliver the collateral. Disposition of the Collateral Once the secured party has obtained possession of the collateral, it has two choices Secured party may (1) dispose of the collateral or (2) retain the collateral as full satisfaction of the debt Disposal of the Collateral a secured party may sell, lease, or otherwise dispose of the collateral in any commercially reasonable manner Typically, the secured party will sell the collateral in either a private or a public sale. First, however, the debtor must receive reasonable notice of the time and place of the sale so that she may bid on the collateral. The higher the price that the secured party gets for the collateral, the lower the balance still owed by the debtor. Giving the debtor notice of the sale and a chance to bid ensures that the collateral will not be sold for an unreasonably low price. Deficiency or surplus Debtor is liable for any deficiency (having insufficient funds to pay off a debt) Surplus - a sum of money greater than the debt incurred When a secured party disposes of collateral in a commercially unreasonable manner, then a deficiency or surplus claim may be adjusted based on the sum that should have been obtained Acceptance of collateral Acceptance - retention of the collateral by a secured party as full or partial satisfaction of a debt Partial satisfaction - means that the debtor will still owe some deficiency to the secured party A secured party who wishes to accept the collateral must notify the debtor. If the debtor agrees in an authenticated record, then the secured party may keep the collateral as full or partial satisfaction of the debt. If the debtor does not respond within 20 days, the secured party may still accept the collateral as full satisfaction, but not as partial satisfaction. In other words, the debtors silence does not give the secured party the right to keep the goods and still sue for more money. A secured party may not accept collateral that is consumer goods if the debtor has possession of the goods or if the debtor has paid 60 percent of the purchase price. Right of Redemption Redeem - to pay the full value of a debt to get the collateral back Proceeding to judgment A secured party may sue the debtor for the full debt Termination A document indicating that a secured party no longer claims a security interest in the collateral For a consumer debt, the secured party must file the termination statement in every place that it filed a financing statement. The secured party must do this within one month from the date the debt is fully paid, or within 20 days of a demand from the consumer, whichever comes first. For other transactions, the secured party must, within 20 days, either file the termination statement or send it to the 21

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

CHAPTER 37 BANKRUPTCY More lenient towards debtors rather than lenders Overview of The Bankruptcy Code The Code - divided into 8 chapters Rehabilitation Objective of Chapter 11 and 13 - to rehabilitate the debtor Hold creditors at bay while the debtor develops a payment plan In return for retaining some of their assets, debtors typically promise to pay creditors a portion of their future earning Liquidation When debtors are unable to develop a feasible plan for rehabilitation under Ch. 11 or 13 Chapter 7 provides for liquidation Aka straight bankruptcy This form mandates that the bankrupt's assets be distributed to creditors but the debtor has no obligation to share future earnings Chapter Description Number Chapter 7 Chapter 11 Topic Liquidation Description The bankrupt's assets are sold to pay creditors. If the debtor owns a business, it terminates. The creditors have no right to the debtor's future earnings.

Reorganization This chapter is designed for businesses and wealthy individuals. Businesses continue in operation and creditors receive a portion of the debtor's current assets and future earnings. Consumer Chapter 13 offers reorganization for the typical consumer. Creditors usually reorganization receive a portion of the individual's current assets and future earnings.

Chapter 13

Debtors sometimes eligible to file under more than one chapter Both debtors and creditors have the right to ask the court to convert a case from one chapter to another at any time during proceedings Goals Bankruptcy protection has 3 primary goals: 1. To preserve as much of the debtor's property as possible 2. To divide the debtor's assets fairly between the debtor and creditors 3. To divide the debtor's assets fairly among creditors Chapter 7 Liquidation Filing a petition Any individual, partnership, corporation, or other business organization that lives, conducts business, or owns property in the US can filed under the Code Case begins with filing in federal district court Debtor - someone who cannot pay his debts and files for protection under the Bankruptcy Code Voluntary petition - filed by a debtor to initiate a bankruptcy case Involuntary petition - filed by creditors to initiate a bankruptcy case Voluntary petition 22

Any debtor has the right to file No necessary that the debtor's liabilities exceed assets Individuals must meet 2 requirements before filing: 1. Within 180 days before the filing, an individual debtor must undergo credit counseling with an approved agency 2. Individual debtors may only file under Ch. 7 if they ear less than the median income in their state or they cannot afford to pay back at least $7,025 over five years; all others generally must file under 11 or 13 Involuntary petition Must meet all of the following requirements: 1. Debtor must owe at least $14,425 in unsecured claims to the creditors who file 2. Debtor has at least 12 creditors, 3 or more must sign the petition. If the debtor has fewer than 12 creditors, any one of them may file a petition 3. The creditors must allege either that a custodian for the debtor's property has been appointed in the prior 120 days or that the debtor has generally not been paying debts that are due Custodian for the debtor's property: state law sometimes permit the appointment of a custodian to protect a debtor's assets; Code allows creditors to pull a case out from under state law and into federal bankruptcy court by filing an involuntary petition Order for relief - an official acknowledgement that a debtor is under the jurisdiction of the bankruptcy court; basically the start of the whole bankruptcy process Trustee Is responsible for gathering the bankrupt's assets and dividing them among creditors U.S. Trustee - oversees the administration of bankruptcy law in a region Creditors After the court issues an order for relief, the US Trustee calls a meeting of all of the creditors Proof of claim - a form stating the name of an unsecured creditor and the amount of the claim against the debtor Secured creditors do not file proofs of claim unless the claim exceeds the value of their collateral. Automatic Stay Prohibits creditors from collecting debts that the bankrupt incurred before the petition was filed Jackson v. Holiday Furniture Facts: Cora and Frank Jackson purchased a recliner on credit from Dan Holiday Furniture; made payments until November; that month, filed for protection under Bankruptcy Code; Dan Holiday received notice of bankruptcy which stated that the store must stop all efforts to collect on the Jacksons' debt Despite notice, Dan Holiday collectors called the Jacksons' house 10 times between 11/15 - 12/1 and left a card threatening repossession; on 12/1 Frank went to pay $230 owed for the two months and allegedly said he and his wife wanted to continue making payments directly to the store In early January, Dan Holiday learned Frank had died the month before; after Cora failed to pay for January, a collector called her house 26 times and the store owner's sister left a threatening message; When she returned home she found 7 bright yellow slips of paper stating a truck had been by to repossess the chair; the threat to send a truck was a ruse to scare Cora; Dan Holiday didn't want the recliner, just wanted to talk; also sent a letter that she had 24 hours to bring her account current or else Repossession will be made and legal action will be taken; Cora's lawyer contacted Dan Holiday and collection activity stopped Issues: Did Dan Holiday violate the automatic stay provision of the Bankruptcy Code? What is the penalty for a violation? Judge's Decision: Automatic stay prohibits the commencement or continuation of any action against the debtor that arose before the commencement of the bankruptcy case and forbids any act by a pre-petition creditor to obtain possession of property of the bankruptcy estate 23

An injured individual by a creditor's violation of the automatic stay shall recover actual damages, and may recover punitive damages No question Dan Holiday repeatedly violated the automatic stay Bankruptcy Estate The new legal entity created when a debtor files a bankruptcy petition; the debtor's existing assets pass into the estate Exempt Property The Code permits individual debtors (but not organizations) to keep some property for themselves Saves the debtor from destitution during bankruptcy process Code defers to state law; permits states to opt out of the federal system and define a different sent of exemptions Under Federal Code, a debtor is allowed to exempt only $21,625; most states exempt items such as the debtor's home, household goods, cars, work tools, disability and pension benefits, alimony, and health aids Some states set no limit on the value of exempt property Voidable preferences Preference - when a debtor unfairly pays creditors immediately before filing a bankruptcy petition Can take two preferences: payments and liens Payment - simply means that the debtor gives a creditor cash that would otherwise end up in the bankruptcy estate Lien - a security interest in the debtor's property If the debtor grants a security interest in specific property, he vaults that creditor out of the great unwashed mass of unsecured creditors and into the elite company of secured creditors The trustee can void any transfer (whether payment or lien) that meets all of the following requirements: Transfer was to a creditor of the bankrupt It was to pay an existing debt The creditor received more from the transfer than she would have received during the bankruptcy process The debtor's liabilities exceeded assets at the time of the transfer The transfer took place in the 90-day period before the filing of the petition Trustee can void a transfer to an insider that occurs in the year preceding the filing of the petition Insiders - family members of an individual, officers and directors of a corporation, or partners of a partnership Fraudulent Transfers A transfer is fraudulent if it made within the year before a petition is filed and its purpose is to hinder, delay, or defraud creditors The trustee can void any fraudulent transfer A trustee cannot void pre-petition payments made in the ordinary course The trustee cannot void payments below $600 or other routine payments Payment of Claims The Code has adopted a number system to prevent a free-for-all fight over the bankrupt's assets All claims are placed in one of three classes (1) secured claims (2) priority claims - 7 subcategories (3) unsecured claims - 3 subcategories The trustee pays the bankruptcy estate to the various classes of claims in order of rank; a higher class is paid in full before the next class receives any payment at all If there aren't enough funds to pay an entire subcategory, all claimants of unsecured claims are treated the same, and if there isn't enough funds to pay the entire class, everyone in the class shares pro rata. Secured Claims Those secured by specific collateral are paid first They are paid by selling a specific asset, not out of the general funds of the estate 24

When the collateral is not valuable enough to pay off the entire secured debt, the creditor must wait in line with the unsecured creditors for the balance Priority Claims 7 subcategories of priority claims Each category is paid in order Alimony and child support Administrative expenses (trustee, lawyers, accountants) Gap expenses: if creditors file an involuntary petition, the debtor will continue to operate her business until the order for relief; any expenses she incurs in the ordinary course of her business during this so-called gap period are paid now Gap period - the period between the time that a creditor files an involuntary petition and the court issues the order for relief Payments to employees Employee benefit plans Consumer deposits Taxes Intoxication injuries Unsecured claims All unsecured subcategories have an equal claim and must be paid together Secured claims that exceed the value of the available collateral Priority claims that exceed the priority limits All other unsecured claims Discharge Fresh start - after the termination of a bankruptcy case, creditors cannot make a claim against the debtor for money owed before the initial bankruptcy petition was filed Once a bankruptcy estate has been distributed to creditors, they cannot make a claim against the debtor for money owed before the filing, whether or not they actually received any payment Discharge - the debtor no longer has an obligation to pay a debt Code limits both the type of debts that can be discharged and the circumstances under which discharge can take place Debts that cannot be discharged Following are never discharged and the debtor remains liable in full until they are paid: Income taxes for the three years prior to filing and property taxes for the prior year Money obtained fraudulently Any loan of more than $600 that a consumer uses to purchase luxury goods within 90 days before the order for relief is granted Cash advances on a credit card totaling more than $875 that an individual debtor takes out within 70 days before the order for relief Debts omitted from the Schedule of Assets and Liabilities that the debtor filed with the petition, if the creditor did not know about the bankruptcy and therefore did not file a proof of claim Money that the debtor stole or obtained through a violation of fiduciary duty Money owed for alimony or child support Debts stemming from intentional and malicious injury Fines and penalties owed to the government Liability for injuries caused by the debtor while operating a vehicle under the influence of drugs or alcohol Liability for breach of duty to a bank Debts stemming from a violation of securities laws Student loans can be discharged only if repayment would cause undue hardship (very hard to prove) In Re Stern 25

Facts: James Stern took out student loans; after found difficult finding a job as a lawyer so he opened his own practice; he and his wife earned less than $20,000 a year Was sued for malpractice; he won but his insurance premium increased so much he could no longer afford the insurance Believe his debt and default on his student loans made him unemployable as a lawyer, he and his wife moved to her native France; he didn't speak French and couldn't get a job; his wife's income over 6 months was $2200; their expenses were more expensive in France Stern owed $147,000 in students loans ($56,000 in principal, $91,000 interest); asked the court to discharge these loans on grounds of undue hardship: "I can't possibly pay this amount and have a life, not with what I expect I'll be able to earn." Issue: Is Stern entitled to a discharge of his student loans on grounds of undue hardship Judge's Decision: To obtain a discharge: must prove his present inability to pay his student loans, and establish his current financial hardship is likely to be long-term Stern went to college and law school; borrowers are obligated to repay loans even if they're unable to obtain employment in their chosen field of study; Court finds disturbing Stern's failure to maximize his income and minimize his expenses; no evidence he made any effort to obtain employment in the US to enhance his earnings Stern says he'd prefer to use his monies on home mortgage or raising children, but the fact that they are unattainable because of the loans does not fit "undue hardship" There are other career opportunities available to him Circumstances that prevent debts from being discharged Business organizations Under Chapter 7 - only the debts of individuals can be discharged, not those of business organizations; once assets have been distributed, the organization must cease operation; if it continues, it's responsible for all pre-petition debts Revocation A court can revoke a discharge within one year if it discovers the debtor engaged in fraud or concealment Dishonesty or bad faith behavior The court may deny discharge altogether if the debtor has, for example, made fraudulent transfers, hidden assets, falsified records, disobeyed court orders, refused to testify, or otherwise acted in bad faith Repeated filings for bankruptcy A debtor who has received a discharge under Chapter 7 or 11 cannot receive another discharge under Chapter 7 for at least 8 years after the prior filing; a debtor who received a prior discharge under Chapter 13 cannot in most cases receive one under Chapter 7 for at least six years Reaffirmation Reaffirm - to promise to pay a debt even after it's discharged May want to reaffirm to a secured debt to avoid losing the collateral To be valid, reaffirmation must: Not violate common law standards for fraud, duress, or unconscionability; if creditors force a bankrupt into reaffirming a debt, the reaffirmation is invalid Have been filed in court before the discharge is granted Include the detailed disclosure statement required by the statute (Section 524) Be approved by the court if the debtor is not represented by an attorney or if, as a result of the reaffirmed debt, the bankrupt's expenses exceed his income In Re: Grisham Facts: 26

2 months before filing for bankruptcy, Grisham bought a Dodge truck; at the time of filing it was worth $16,000 but he owed $17,500 on it; annual interest rate was 17.5%; monthly payments were $400 and the schedule was almost 6 years In addition, he owed $274,000 to IRS, alimony, student loans, unsecured debt Issue: Would reaffirmation of this debt create an undue hardship for the debtor? Decision: Debtor describes himself as retired/unemployed; only source of income $1928/month social security + $1698/month in unemployment benefits Owns no real property and currently lives rent-free at a relative's home After deducting living expenses, net income is -$1091 In this circumstance the payments are unduly burdensome; several obligations that will likely survive his discharge in bankruptcy (IRS debt, alimony, student loans) Court will not stamp its seal of approval on the Debtor's reaffirmation of the debt; to do so would create hardship on this debtor and doesn't otherwise seem justified Reaffirmation agreement is disapproved Chapter 11 Reorganization Reviving a business so it can ultimately emerge as a viable economic company Proceedings: a petition (voluntary or involuntary), order for relief, meeting of creditors, proofs of claim, and an automatic stay Debtor in possession Chapter 11 does not require a trustee The debtor acts as trustee in a Chapter 11 bankruptcy Two jobs: to operate the business and to develop a plan of reorganization Trustee chosen only if the debtor is incompetent or uncooperative Creditors' committee Protects the interests of its constituency and may play a role in developing the plan of reorganization Communicates with all creditors US Trustee appoints the 7 largest unsecured creditors to the committee; may be required to appoint some small-business creditors as well If its a corporation, may also appoint a committee of shareholders Code refers to the claims of creditors and the interests of shareholders Plan of reorganization Once petition is filed, an automatic stay goes into effect to provide the debtor with temporary relief from creditors Next stage: develop a plan of reorganization that provides for the payment of debts and the continuation of the business For the first 120 days (which the court can extend up to 18 months), the debtor has the exclusive right to propose a plan If the debtor fails to file a plan, or if the court rejects it, then creditors and shareholders can develop their own plan Confirmation of the plan Disclosure statement - provide creditors and shareholders with enough information to make an informed judgment; must be court-approved before its sent out to creditors and shareholders All creditors and shareholders have the right to vote on the plan of reorganization; each creditor and shareholder is assigned to a class Classes: 1. Secured claims 2. Priority claims 3. Unsecured claims Each secured claim is usually in its own class because each one if secured by different collateral; also divided based on their interests 27

After the vote, the bankruptcy court holds a confirmation hearing to determine whether it should accept the plan. The court will approve a plan if a majority of each class votes in favor it and if the "yes" votes hold at least 2/3rs of the total debt in that class Cramdown - court can still confirm the plan even if some classes vote against the plan (the plan is crammed down the creditors' throats); will not impose a cramdown unless, in its view, the plan is feasible and fair In Re Fox Facts: Donald Fox founded Midland Fumigant, Inc; In a prior case, a competitor obtained a verdict of $2million against Midland and Fox for fraud Unable to pay judgment, Fox filed a voluntary petition under Chapter 11 of the Bankruptcy Code; his plan of reorganization envisioned that he would use revenues from Midland to pay off his creditors in full over five years, with interest Fox hired a CPA to analyze the feasibility of the plan; concluded that the plan's projections were conservative and could be met easily Had 6 classes of creditors; all the classes accepted the plan except the two in which United was in; bankruptcy judge noted that United had an incentive to opposed the reorganization because if Midland ceased operations, it would be able to raise its prices substantially Issues: Was Fox's plan or reorganization feasible and fair? Should the court impose a cramdown? Decision: Debtor has proposed a plan which pays all creditors in full, with interest; has provided a reasonable and orderly repayment of his debts Plan has a reasonable assurance of success; also United States Trustee has filed a statement in support of confirmation of the Plan Debtor's plan is confirmed over the objection of United and over the dissenting votes of the classes Discharge A confirmed plan of reorganization is binding on the debtor, creditors, and shareholders Debtor now owns the assets in the bankrupt estate, free of all obligations except those listed in the plan Chapter 7 debtor typically relinquishes all assets (except exempt property) to creditors but then has no obligation to turn over future income Small-business bankruptcy For businesses with less than $2million in debt After the order for relief, the bankrupt has the exclusive right to file a plan for 180 days; both a plan and a disclosure statement must be filed within 300 days Court must confirm or reject the plan within 45 days after its filing If deadlines are not met, the case can be converted to chapter 7 or dismissed Chapter 13 Consumer Reorganizations Purpose is to rehabilitate an individual debtor Not available to businesses or individuals with more than $360,475 in unsecured debts or $1,081,400 in secured debts Typically keeps most of her assets in exchange for a promise to repay some of her debts using future income To be eligible, must have a regular source of income Easier and cheaper than chapter 7 and 11; consequently more money is retained for both creditors and debtor Marrama v. Citizens Bank of Massachusetts Facts: When Robert Marrama filed a voluntary petition under Chapter 7, he lied Disclosed he was the sole beneficiary of a trust that owned a house in Maine, but listed value of house as $0; also denied he had transferred any property during the prior year (had given it for free to the trust 7 months prior to filing for bankruptcy protection) Lied when he claimed he was not entitled to a tax refund; knew he had a check for $8700 from the IRS coming in the mail 28

Marrama found out bankruptcy trustees were going after the Maine property, he filed a notice to convert his chapter 7 to chapter 13; trustees and creditors objected; contend because Marrama acted in bad faith he shouldn't be permitted to convert; bankruptcy court and appeals court agreed; Supreme Court granted certiorari You be the Judge: can a bankruptcy court refuse to allow a debtor to convert from 7 to 13? Argument for Marram: Allowed to convert with only two restrictions: Bankrupt can convert only once Debtor must meet the conditions that would have been required for him to file under the new chapter in the first place Nothing said about bad faith Argument for bankruptcy trustees: Court has unquestioned right to dismiss a chapter 13 petition if the debtor demonstrates bad faith Seems no logical reason why a court would have the right to dismiss a case for bad faith but not the first to prohibit a filing under chapter 13 to begin with File a petition, creditors submit proofs of claim, the court imposes an automatic stay, the debtor files a plan, the court confirms the plan Beginning a chapter 13 case Debtor must file a voluntary petition Creditors cannot use an involuntary petition to force a debtor into Chapter 13 US Trustee appoints a trustee to supervise the debtor, although the debtor remains in possession of the bankruptcy estate; also serves as a central clearinghouse for the debtor's payments to creditors; debtor pays the trustee who in turn transmits these funds to creditors Plan of payment Must file a plan of payment within 15 days after filing the voluntary petition Only the debtor can file a plan; the creditors have no right to file their own version Debtor must (1) commit some future earnings to pay off debts, (2) promise to pay all secured and priority claims in full, and (3) treat all remaining classes equally; if the plan doesn't provide for the debtor to pay off creditors in full, then all of the debtor's disposable income for the next five years must go to creditors Within 30 days after filing the plan, must begin making payments to trustee under the plan; only bankruptcy court has authority to confirm or reject a plan of payment To confirm a plan, court must ensure that: Creditors have the opportunity to voice their objections at a hearing All of the unsecured creditors receive at least as much as they would have if the bankruptcy estate had been liquidated under chapter 7 Plan is feasible and the bankruptcy will be able to make the promised payments Plan doesn't extend beyond three years without good reason and in no event lasts longer than 5 years; and The debtor is acting in good faith, making a reasonable effort to pay obligations Discharge Once confirmed, a plan is binding The debtor is washed clean of all pre-petition debts except those provided for in the plan, but, unlike chapter 7 the debts are not permanently discharged If debtor violates the plan, all debts are revived and the court may either dismiss the case or convert it to a liquidation proceeding under chapter 7 Any debtor who has received a discharge under chapter 7 or 11 within the prior 4 years or under chapter 13 within the prior 2 years, is not eligible under chapter 13 If the debtor's circumstances change, the debtor, the trustee, or unsecured creditors can ask the court to modify the plan Conclusion 29

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

Chapter 7 Objective Who Uses it Type of Petition Administration of Bankruptcy Estate Selection of Trustee Liquidation Individual or org. Voluntary or involuntary Trustee

Chapter 11 Reorganization Individual or org. Voluntary or involuntary Debtor in possession (trustee selected only if debtor is unable to serve) Usually no trustee

Chapter 13 Consumer reorganization Individual Only voluntary Trustee

Creditors have right to elect trustees; or US Trustee makes appoints No plan is filed Creditors do not vote

Appointed by US Trustee

Participation in Formulation of Plan Creditor approval of plan Impact on Debtor's Post-petition income

Both creditors and debtor can propose plans Creditors vote on plan, but court may approve plan without the creditors' support Must contribute toward payment of pre-petition debts

Only debtor can propose plan Creditors do not vote on plan

Not affected; debtor keeps all future earnings

Must contribute toward payment of pre-petition debts

CHAPTER 39 CONSUMER LAW Introduction Federal Trade Commission Several options for enforcing the law: Voluntary compliance When it determines that a business has violated the law, it first asks the offender to sign a voluntary compliance affidavit promising to stop the prohibited activity Administrative hearings and appeals If it refuses to stop voluntarily, takes the case to an administrative law judge (ALJ) within the agency Violator may settle the case at this point by signing a consent order If case proceeds to a hearing, the ALJ has the right to issue a cease and desist order, commanding the violator to stop the offending activity A defendant can appeal such an order to the five Commissioners of the FTC, from there to a federal appeals court, and ultimately to the US Supreme Court Penalties FTC can impose a fine for each violation of a voluntary compliance affidavit, a consent order, a cease and desist order, an FTC rule, or a cease and desist order issued against someone else FTC can file suit in federal court asking for damages on behalf of an injured consumer if 1. The defendant has violated FTC rules and 2. A reasonable person would have known under the circumstances that the conduct was dishonest or fraudulent 30

Consumer Financial Protection Bureau (CFPB) Regulates consumer financial products and services, including mortgages, credit cards, and private student loans Goals: to clarify and simplify the terms of credit cards, checking accounts, and mortgage disclosure forms Sales Section 5 of the FTC Act prohibits "unfair and deceptive acts or practices" Deceptive Acts or Practices Under the FTC Act, an advertisement is deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer Federal Trade Commission v. Direct Marketing Concepts, Inc. Facts: Direct Marketing Concepts, Inc. broad cast an infomercial for Coral Calcium that featured a spokesperson named Robert Barefoot; claimed virtually all diseases are caused by a condition called acidosis; further claimed that calcium derived from coral cures these diseases by rendering the body more alkaline and made false claims that people had said it cured them of cancer/I've see people jump out of wheelchairs" Noted unspecified articles from several medical journals Over 18 months, generated $54 million in sales FTC filed suit against the company and its owners, alleging that the infomercials were deceptive; trial court granted FTCs motion for summary judgment, ruling the infomercials were misleading as a matter of law, and therefore there was no need for a trial; defendants appealed Issue: Were these infomercials misleading as a matter of law? Decision: When FTC brings action based on theory of deceptive ads because advertises lacked a reasonable basis for claims, FTC must: 1. Demonstrate what evidence would in fact establish such a claim in the relevant scientific community; and 2. Compare the advertisers' evidence to that required by the scientific community to see if the claims have been established Produced four expert declarations which demonstrated that the claims could be substantiated by double-blind, placebo-controlled human studies; scientific evidence is required for substantiation and defendants neither produced nor pointed to any evidence any facts; summary judgment was appropriate Experts specifically opined that 1. No evidence that calcium cures cancer 2. Some evidence that calcium might lower blood pressure but none that it cures heart disease 3. No evidence whatsoever that calcium has any effect on autoimmune disorders, and 4. No research published in the medical journals that indicate calcium "reverses" cancer Defendants claims only puffery which was further attenuated by the presence of general disclaimers; however specific and measurable claims are not puffery and may be the subject of deceptive advertising claims Disclaims or qualifications in any ad are not adequate to avoid liability unless they are sufficiently prominent and unambiguous to change the apparent impression; this infomercial's transcripts reveal only disclaimers that the infomercials are paid advertising; the health claims were bold and straightforward, presented by supposed experts as testable observations backed up by clinical trials and studies Affirm district court's grant of summary judgment Unfair Practices The Commission considers a practice to be unfair if it meets all of the following three tests: It causes a substantial consumer injury Physical or financial injury 31

The harm of the injury outweighs any countervailing benefit The consumer could not reasonably avoid the injury FTC vigilant in protecting susceptible consumers, i.e., elderly or the ill In addition, the FTC may decide that a practice is unfair simply because it violates public poicy, even if it does not meet these three theses Additional Sales Rules Bait-and-Switch A practice where sellers advertise products that are not generally available but are being used to draw interested parties in so that they will buy other products FTC rules prohibit bait-and-switch advertisements a merchant may not advertise a product and then disparage it to consumers in an effort to sell a different (more expensive) item Merchandise bought by mail, by telephone, or online The FTC has established the following rules for this type of merchandise: Sellers must ship an item within the time state or, if no time is given, within 30 days after receipt of the order If a company cannot ship the product when promised, it must send the customer a notice with the new shipping date and an opportunity to cancel; if the new shipping date is within 30 days of the original one and the customer does not cancel, the order is still valid If the company cannot ship by the second shipment date it must send the customer another notice; this time, however, the company must cancel the order unless the customer returns the notice, indicating that he still wants the item Telemarketing FTC prohibits telemarketers from calling any telephone number listed on its do-not-call registry; prohibits telemarketers from blocking their names and telephone numbers on Caller ID systems Robocalls are illegal unless the telemarketer obtains written permission from the person being called Unordered merchandise Under Section 5 of the fTC Act, anyone who receives unordered merchandise in the mail can treat it as a gift Door-to-door sales Consumers at home need special protection from unscrupulous salespeople A salesperson is required to notify the buyer that she has the right to cancel the transaction prior to midnight of the third business day thereafter Notice must be given both orally and in writing, actual cancellation must be in writing; seller must return the buyer's money within 10 days Consumer Credit Truth in Lending Act - General Provisions Requires lenders to disclose the terms of a loan in an understandable and complete manner Applicability TILA applies to a transaction only if all of the following tests are met: It's a consumer loan Loan has a finance charge or will be repaid in more than four installments The loan is for less than $50,000, is secured by a mortgage on real estate, or is a private education loan The loan is made by someone in the business of offering credit Disclosure All TILA loans. In all loans regulated by TILA: The disclosure must be clear and in meaningful sequence The lender must disclose the finance charge Finance charge is the amount, in dollars, the consumer will pay in interest and fees over the life of the loan The creditor must also disclose the annual percentage rate (APR) 32

The actual rate of interest the consumer pays on an annual basis All TILA loans must meet these 3 requirements; requires additional disclosure for 2 types of loans: open-end credit and closed-end credit Closed-end credit The loan is a fixed amount and the borrower knows the payment schedule in advance Before a consumer enters into a closed-end transaction, the lender must disclose: The cash price, total down payment, amount financed; itemized list of all other charges; number, amount, and due dates of payments; total amount of payments; late payment charges; penalties for prepaying the loan; and lender's security interest in the item purchased Advertising TILA requires lenders to advertise their rates accurately If the lender advertises any credit terms, it must tell the whole story Enforcement FTC generally has the right to enforce TILA Consumers who've been injured by any violation (except for the advertising provisions) have the right to file suit Home Loans Mortgage Loans TILA prohibits unfair, abusive, or deceptive home mortgage lending practices Under TILA, lenders: Must make a good faith effort to determine whether a borrower can afford to repay the loan May not coerce or bribe an appraiser into misstating a home's value Cannot charge prepayment penalties on adjustable rate mortgages TILA regulates subprime loans (aka higher-priced mortgage loans; loans that have an above-market interest rate because they involve high-risk borrowers; for sub-prime loans, a lender Must collect property taxes and homeowners insurance for all first mortgages May not make loans that have balloon payments (very large payments at the end) May not charge excessive late fees) Home Equity Loans Swindlers offer home equity loans, secured by a second mortgage, to finance fraudulent repairs (though there are legitimate lenders) If a home equity installment loan: Has an APR more than 10% points higher than Treasury securities, or the consumer must pay fees and points at closing that are higher than 8% of the total loan amount, then at least 3 business days before the loan closing, the lender must notify the consumer that 1. He doesn't have to go through with the loan and 2. He could lose his house if he fails to make payments Loans that are for less than 5 year may not contain balloon payments Rescission Consumers have the right to rescind a mortgage for up to 3 business days after the signing (including Saturdays); if lender doesn't comply with the disclosure provisions of TILA, the consumer can rescind for up to 3 years from the date of the mortgage Right of rescission does not apply to a first mortgage used to finance a house purchase or to any refinancing with the consumer's existing lender

33

TILA applies to a transaction only if:

It's a consumer loan Loan has a finance charge or will be repaid in more than 4 installments Loan is for less than $50,000 or to secure a mortgage on real estate Loan is made by someone in the business of offering credit

In all loans regulated by TILA

Disclosure must be clear and in meaningful sequence Lender must disclose the finance change and the APR

For regular mortgage loans

Lenders musty verify the borrowers' ability to repay the loan; lenders may not coerce or bribe an appraiser into misstating a home's value; lenders cannot charge prepayment penalties on adjustable rate mortgages Loans with balloon payments are prohibited Late fees are limited

For subprime mortgage loans

Credit Cards Disclosure Open-end credit: credit transaction in which the lender makes a series of loans that the consume can repay at once or in installments Rules apply to all consumer credit cards In any advertisement or solicitation, the lender must disclose: Credit terms In case of a teaser rate, must clearly disclose that the rate is introductory, when it expires, and the permanent rate that will replace it Before establishing an open-end credit account, the lender must disclose to the consumer: When a finance charge will be imposed, and How the finance charge will be calculated In each monthly statement, the lender must disclose: The amount owed at the beginning of the billing cycle Amounts and dates of all purchases, credits, and payments Finance charges and late fees Date by which a bill must be paid to avoid these charges; and Either the consequence of making the monthly minimum payment or a toll-free number that can be used to obtain such information Regulation of Credit Card Debt Credit Card Act of 2009: companies, Cannot increase interest rate, fees, or charges on balances a consumer has already run up unless she is more than 60 days late in making the minimum payment Must give 45 days' notice before increasing a card's APR or making any other significant change in credit terms Must re-evaluate any rate increase every six months, and then, if a decrease is warranted, it must occur within 45 days after the evaluation Must give notice of the consumer's right to cancel a card and pay off the debt once the APR is changed Cannot charge interest on fees or on a bill that is paid on time or during a grace period Cannot charge late payment fees of more than $25 (unless one of the consumer's last 6 payments was late, in which case the fee may be up to $35 or the company can show that its costs justify a higher fee 34

Cannot charge late fees that are greater than the minimum payment owed Cannot charge more than one fee per event, such as a single late payment Must mail the bill at least 21 days before the due date, disclose what the due date is, and set the same due date each month Cannot set due dates on weekends or in the middle of the day Must warn consumers about the impact of making minimum-only payments Must apply any payments to whichever debt on the card has the highest interest rate Must offer consumers the right to set a fixed credit limit; consumers cannot be charged a fee if the company accepts charges above that limit unless the consumer has agreed to the fee Cannot issue credit cards to people under 21 unless the person has income or the application is co-signed by someone who can afford to pay the bills Liability Stolen Cards You are liable only for the first $50 in charges the thief makes before you notify the credit card company If the thief steals just your credit card number, but not the card itself, you are not liable for any unauthorized charges Disputes with merchants In the event of a dispute between a customer and a merchant, the credit card company cannot bill the customer if 1. She makes a good faith effort to resolve the dispute 2. The dispute is for more than $50, and 3. The merchant is in the same state where she lives or is within 100 miles of her home If a customer seems to have a reasonable claim against a merchant, the credit card company will typically transfer the credit it has given the merchant back to the customer's account Disputes with the credit card company The Fair Credit Billing Act (FCBA) provides additional protection for credit card holders (and for holders of so-called revolving charge accounts) - such as those from stores) Under the FCBA: If, within 60 days of receipt of a bill, a consumer writes to a credit card company to complain about the bill, the company must acknowledge receipt of the complaint within 30 days Within two billing cycles (but no more than 90 days) the credit card company must investigate the company and respond: In the case of an error, by correcting the mistake and notifying the consumer If there is no error, by writing to the consumer with an explanation Whether or not there was a mistake, if the consumer requests it, the credit card company must supply documentary evidence to support its position The credit card company cannot try to collect the disputed debt or close or suspend the account until it has responded to the consumer complaint The credit card company cannot report to credit agencies that the consumer has an unpaid bill until 10 days after the response; if the consumer still disputes the charge, the credit card company may report the amount to a credit agency but must disclose that it's disputed Gray v. American Express Co. Facts: In December, Gray used his AmEx credit card to buy airline tickets costing $9,312; AmEx agreed to let him pay for it in 12 monthly installments Paid installments in January and February AmEx accidentally billed Gray by mistake for the entire balance in March; Gray didn't pay 35

In April, tried paying for dinner and card was rejected; restaurant was instructed to confiscate and destroy card; spoke with AmEx employee at restaurant and was told account was cancelled as of now Gray wrote to AmEx; for more than a year they failed to respond to Gray or investigate claims and turned bill over to a collection agency Gray sued AmEx for violating the Fair Credit Billing Act; trial court granted summary judgment to AmEx and dismissed the complaint on the grounds that Gray had waived his rights under the act Issue: Is AmEx liable to Gray for violating the FCBA Decision: Act states that during the pendency of a disputed billing, the card issuer shall not cause the cardholder's account to be restricted or closed because of the failure of the obligor to pay the amount in dispute Rationale of consumer protection legislation is to even out the inequalities that consumers normally bring to the bargain; to allow such protection to be waived by boiler plate language of the contract puts the legislative process to a foolish and unproductive task Order of summary judgment and dismissal is hereby vacated Debit Cards Liability Check card - another name for a debit card Liability for a stolen debit card is much greater Timeline Report the loss before anyone uses your card, you are not liable for any unauthorized withdrawals Report the theft within 2 days of discovering it, the bank will make good on all losses above $50 If you wait until after 2 days, your bank will only replace stolen funds above $500 After 60 days of receipt of your bank statement, all losses are yours: the bank will not repay any stolen funds If an unauthorized transfer takes place using just your number, not your card, then you are not liable at all as long as you report the loss within 60 days of receiving the bank statement showing the loss; after 60 days you are liable for the full amount Fees Under new rules, banks are not allowed to overdraw an account and charge the fee unless the consumer signs up for an overdraft plan Consumers who don't "opt in" to the overdraft plan will not be able to overdraw their account, no matter how desperate they are Merchants can now offer different prices depending on how a consumer pays for a purchase - cash, credit, or debit - but they cannot vary the prices across brands -(MasterCard v. Visa, or different banks) Credit Reports Accuracy of Credit Reports Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions Act (FACTA) and DoddFrank regulate credit reports Consumer reporting agencies are businesses that supply consumer reports to third parties Consumer reports - any communication about a consumer's creditworthiness, character, general reputation, or lifestyle that is considered as a factor in establishing credit, obtaining insurance, securing a job, acquiring a government license, or for any other legitimate business need Under the FCRA: Consumer reporting agency cannot report obsolete information Ordinary credit info is obsolete after 7 years; bankruptcies after 10 year If applying for more than $150,000 of credit or life insurance, or for a job that pays more than $75,000 a year, then there is no time limit 36

Investigative reports - discuss character, reputation, or lifestyle; become obsolete in 3 months; cannot be ordered without first informing the consumer An agency cannot report medical information without the consumer's permission An employer cannot request a consumer report of any current or potential employee without the employee's permission; an employer cannot take action because of information in the consumer report without first giving the current or potential employee a copy of the report and a description of the employee's rights under this statute Anyone who makes an adverse decision against a consumer because of a credit report must reveal the name and address of the reporting agency that supplied the information An "adverse decision" includes denying credit or charging higher rates Upon request from a consumer, a reporting agency must disclose all information in his file, the source of the information (except for investigative reports), the name of anyone to whom the report has been sent in the prior year (2 years for employment purposes), and the name of anyone who has requested a report in the prior year If a consumer tells an agency that some info in the file is incorrect The agency must both investigate and forward the data to the information provider info provider must investigate and report the results to the agency If the data are inaccurate, the info provider must so notify all national credit agencies Consumer also has the right to give the agency a short report telling his side of the story Agency must then include consumer's statement with any credit reports it supplies and also, at the consumer's request, send the statement to anyone who has received a report within 6 months (or two years for employment purposes) Access to Credit Reports and Credit Scores Under FACTA, consumers are entitled to one free credit report every year from each of the 3 major reporting agencies: Equifax, Experian, and TransUnion Recommended you check your report every year If you find errors, notify the agency in writing and warn it that failing to make corrections is a violation of the law Credit score (aka FICO score) ranges between 300 and 850 Not automatically included as part of your credit report, but now anyone who penalizes you because of your score has to give it to you for free Identify Theft FACTA created the National Fraud Alert system - permits consumers who fear they may be the victim of identity theft to place an alert in their credit files, warning financial institutions to investigate carefully before issuing any new credit; also requires credit bureaus to share information about identity theft Fraud alter doesn't prevent identity theft so many states permit a "security freeze" which prohibits any access to a consumer's credit report No one, event the consumer, can obtain a credit report Downside: must pay a fee to thaw the account Under Gramm-Leach-Bliley Privacy Act of 1999, banks other financial institutions, and consumer reporting agencies must notify a consumer 1. Before disclosing any personal information to a third party 2. If there has been unauthorized access to the consumer's sensitive personal information (company cannot disclose private info if the consumer opts out -that is denies permission) Debt Collection The Fair Debt Collection Practices Act (FDCPA) - designed to protect consumers from abusive debt collection efforts Statute provides that a collector must, within 5 days of contacting a debtor, send the debtor a written notice containing the amount of the debt, the name of the creditor to whom the debt is owed, and a statement 37

that if the debtor disputes the debt (in writing), the collector will cease all collection efforts until it has sent evidence of the debt Under FDCPA, collectors may not: Call or write a debtor who has notified the collector in writing that he wishes no further contact Call or write a debtor who is represented by an attorney Call a debtor before 8am or after 9pm Threaten a debtor or use obscene or abusive language Call or visit the debtor at work if the consumer's employer prohibits such contact Imply that they are attorneys or government representatives when they are not, or use a false name Threaten to arrest consumers who do not pay their debts Make other false or deceptive threats - that is, threats that would be illegal if carried out or which the collector has no intention of doing - such as suing the debtor or seizing property Contact acquaintances of the debtor for any reason other than to locate the debtor (and then only once), or Tell acquaintances that the consumer is in debt In the event of a violation of the FDCPA, debtor is entitled to damages, court costs, and attorney's fees; FTC also has authority to enforce the Act Brown v. Card Service Center Facts: Card Service Center (CSC) sent Elizabeth Brown a collection letter demanding payment of a delinquent credit card balance of $1,874 Letter said: "refusal to cooperate could result in a legal suit ...you have 5 days could result in our forwarding this account to our attorney with directions to continue collection efforts" Brown didn't contact them within 5 days and CSC did nothing other than send more collection letters Brown filed suit, alleging that CSC violated the FDCPA; alleged that the letter was deceptive because the company never had any intention of carrying out its threats District court granted CSC's motion to dismiss; Brown appealed Issue: Did CSC's letter violate the FDCPA? Argument for Brown: CSC's letter indicated that there were 2 options: a lawsuit or referral to an attorney; neither happened and CSC knew when it sent the letter that neither would happen Letter was an empty threat - the type of behavior FDCPA prohibits Possible a sophisticated debtor would realize that CSC had no intention of filing, but point of FDCPA is to protect all consumers Argument for CSC: Letter said "could" not "will"; did not imply that legal action was imminent, only that it was possible Equal Credit Opportunity Act ECOA prohibits any creditor from discriminating against a borrower because of race, color, religion, national origin, sex, marital status, age (as long as the borrower is old enough to enter into a legal contract), or because the borrower is receiving welfare Lender must respond to a credit application within 30 days; if a lender rejects an application, it must either tell the applicant why or notify him that he has the right to a written explanation of the reasons for this adverse action Treadway v. Gateway Chevrolet Oldsmobile, Inc. Facts: Gateway Chevrolet Oldsmobile, a car dealership, sent an unsolicited letter to Tonja Treadway notifying her that she was "pre-approved" for the financing to purchase a car Gateway didn't provide financing itself; instead, it arranged loans through banks or finance companies 38

Treadway called to say she was interested in buying a used car Dealer got her credit report, and determined she wasn't eligible for financing; not surprising since Gateway bought her name from a list of people who had recently filed for bankruptcy Gateway called her and invited her to come to the dealership; told her they had found a bank that would finance her transaction but only if she got new car and had a co-signer Got a new car, had her godmother Pearlie Smith to co-sign Gateway had an agent deliver papers directly to Smith's house to be signed immediately; if Smith had read them before she signed she would have realized she had committed herself to being the sole purchaser and owner of the car; had no idea until she started receiving bills on the car loan Treadway made 1st payment on behalf of Smith; then both refused to pay: Smith didn't want the car and Treadway because the car was not hers Car was repossessed, but the financing company continued to demand payment Gateway was running a scam Treadway sued, alleging that Gateway had violated the ECOA by not notifying her that it had taken an adverse action against her District court granted Gateway's motion for summary judgment on grounds that Gateway hadn't committed an adverse action under the ECOA; appeal followed Issue: Did Gateway violate the ECOA Decision: "adverse action" - defined in relevant part by the ECOA as "a denial or revocation of credit" By unilaterally deciding not to send Treadway's application to any lender, Gateway effectively denied credit to Treadway Whether it's the lend or the dealership that makes the decision, both the action and the outcome are the same In both cases, the decision maker 1. Reviews the applicant's credit report to determine whether she is creditworthy 2. Makes a determination adverse to the applicant (i.e., that she is not creditworthy) 3. Decides not to proceed any further in arranging credit and 4. As a result the applicant is not granted credit Gateway's action constitutes an "adverse action" for purposes of the ECOA Consumer Leasing Act Does not apply to any lease for more than $50,000 or to the rental of real property - that is, to house or apartment leases Before a lease is signed, a lessor must disclose the following in writing: All required payments, including deposits, down payments, taxes, and license fees The number and amount of each monthly payment and how payments are calculated Balloon payments (payments due at the end of the lease) Required insurance payments Annual mileage allowance The total amount the consumer will have paid by the end of the lease Available warranties Maintenance requirement and a description of the lessor's wear and use standards Penalties for late payments The consumer's right to purchase the leased property, and at what price, The consumer's right to terminate a lease early, and Any penalties for early termination Magnuson-Moss Warranty Act Does not require manufacturers or sellers to provide a warranty on their products The Act does require any supplier that offers a written warranty on a consumer product that costs more than $15 to disclose the terms of the warranty in simple, understandable language before the sale 39

Applies only to written warranties on goods (not services) sold to consumers Does cover sales by catalog or on the Internet Required disclosure includes the following: The name and address of the person the consumer should contact to obtain warranty service The parts that are covered and those that are not What services the warrantor will provide, at whose expense, and for what period of time, and A statement of what the consumer must do and what expenses he must pay Full warranty - the warrantor must promise to fix a defective product for a reasonable time without charge; if after a reasonable number of efforts to fix the defective productive, it still does not work, the consumer must have the right to a refund or a replacement without charge; but the warrantor is not required to cover damage cause by the consumer's unreasonable use Consumer Product Safety Goal of Consumer Product Safety Act of 1972 (CPSA) was to prevent injuries in the first place Created the Consumer Product Safety Commission (CPSC) to evaluate consumer products and develop safety standards Manufacturers must report all potentially hazardous product defects within 24 hours of discovery Commission can impose civil and criminal penalties on those who violate its standards Chapter Conclusion Virtually no one will go through life without reading an advertisement, ordering online, borrowing money, acquiring a credit report, or using a consumer product

CHAPTER 43 REAL PROPERTY AND LANDLORD-TENANT LAW Nature of Real Property Property falls into 3 categories: real, personal, and intellectual Real property: Land Most common and important form of real property Usually includes anything underground (subsurface right), and some amount of airspace above land (air rights) Buildings Houses, office buildings, apartment complexes, and factories Plant life Whether the plants are naturally occurring, like trees, or cultivated crops When a landowner sells his property, plant life is automatically included in the sale unless the parties agree otherwise A landowner may also sell the plant life separately if he wishes Sale of the plant life alone, without the land, is a sale of goods Fixtures Goods that have become attached to real property Ex: furnace and heating ducts were goods when they were manufactured and when they were sold to the builder, but when the builder attached them to the house, the items became fixtures (neither the refrigerator nor the grand piano is a fixture) An object is a fixture if a reasonable person would consider the item to be a permanent party of the property, taking into account attachment, adaptation, and other objective manifestations of permanence: Attachment: if an object is attached to property in such a way that removing it would damage the property, it is probably a fixture 40

Adaptation: something that's made or adapted especially for attachment to the particular property is probably a fixture, such as custom-made bookshelves fitted in a library Other manifestations of permanence: if the owner clearly intends the item to remain permanently, it's probably a fixture Freeman v. Barrs Facts: Mary Ann Barrs paid $3.5 million to Francis Freeman for 4,000 acres of ranch lands, including a covered "pole-barn" which had open sides, a large cattle scale, and an enclosed vet's office Parties used a form contract, which stated that all fixtures were included with the sale Document offered space for the parties to specify items that were included or excluded with the sale, but neither party listed the cattle scale as either in or out of the deal Got into a fight after the agreement went through Trial judge grilled numerous witnesses and ultimately weighed in on the side of Barrs, declaring the scale a fixture that belonged to the real estate; Freeman appealed Issue: Was the cattle scale a fixture? Decision: The person who designed the scale testified the scale was designed to be portable and 70% of the scales he sold were installed in the present manner Would only take about 1hour and 15 minutes to move scale Characterization of an item as a fixture depends upon the finding of 3 elements: Annexation to the realty Adaptation to the use to which the realty is devoted Intent of the annexor that the object become a permanent accession to the freehold Court decided the scale was a fixture; that, therefore, the sale of the real estate on which it was situate included the sale of the scale; permanency of installation is emphasized by the fact the facility is covered and has a vet office in which the printer for the scale may be operated; scale was put in place to facilitate the cattle operation on the premises Affirmed. Estates in Real Property Fee simple absolute - full ownership privileges in a property Different rights someone can hold in real property are known as estates or interests Concurrent Estates Two or more people owning property at the same time Most common forms: tenancy in common, joint tenancy, and tenancy by the entirety Tenancy in common Two or more people holding equal interest in a property, but with no right of survivorship Convey a deed - transfer the deed Can be created in a will The "default setting" when multiple people acquire property They own an equal interest in the entire property, don't own a particular section of the property Any co-tenant may convey her interest in the property to another person Partition Division of the property among the co-tenants Any co-tenant is entitled to demand partition of the property If various co-tenants cannot agree on fair division, can request a court to do it All co-tenants have an absolute right to partition Court normally attempt a partition by kind - it actually divides the land equally among the cotenants If no way to fairly divide the property, the court will order the real estate sold and the proceeds divided equally Joint Tenancy 41

Two or more people holding equal interest in a property, with the right of survivorship When one joint tenant dies, his interest in the property passes to the surviving joint tenants Joint tenants can convey their interest during their lifetime (but not by will) Jackson v. Estate of Green Facts: Green and Jackson owned land as joint tenants Green filed a petition asking a court to partition the parcels, but died while partition was still pending Lower courts found that because the partition was not complete at the time of Green's death, the land reverted to Jackson Green's estate appealed Issue: does filing for the partition of a joint tenancy terminate survivorship rights? Decision: Agree with Court of Appeals that defendant's interest in the parcel of land automatically reverted to plaintiff when defendant died; defendant's estate has no interest A party can sever a joint tenancy by compelling a partition; until an order or partition has been entered, however a partition has not been compelled and, thus, the joint tenancy has not been severed Filing of the partition action did not sever the joint tenancy because a order effectuating a partition had not entered at the time of defendant's death; regardles whether defendant's partition action survived his death under the survival statute, his interest in the parcel of land did not Affirmed Tenancy by the Entirety The husband and wife each own the entire property, and they both have a right of survivorship Neither party has a right to convey his or her interest If the parties wish to sell their interest, they must do so together No creditor may seize the property based on a debt incurred by only one spouse Divorce terminates a tenancy by the entirety and leaves the two parties as tenants in common Community property Allows the husband and wife to maintain separate ownership of assets they bring to the marriage or inherit Those assets are called separate property; remain private property of each spouse during the marriage Income or assets that either party earns during the marriage are considered community property, which must be equally shared during the marriage, regardless of who earns it Neither party may convey community property without the consent of the other When a spouse dies, 1/2 of the community property goes to the surviving spouse, and the other half goes to the heirs of the deceased Future Interests Life estate - ownership of property for the lifetime of a particular person Reversion The right of an owner (or her heirs) to property upon the death of a life tenant The owner may convey his reversion at any time; is allowed to sell the land, but the buyer must bide his time until the life tenant's death Remainder Same value as a reversion, but when the life tenant dies, the property goes to a named 3rd person, not the original owner Nonpossessory Interests Interests that never involve possession Easements 42

The right to enter land belonging to another and make limited use of it, without taking anything away 2 kinds of easements: Easement appurtenant - benefits its owner in the use of another parcel of land; runs with the land (if the owner of the dominant tenement sells her land, the buyers acquires the easement as well Dominant tenement - the property that benefits from the easement Servient tenement - the land that is burdened by the easement Easement in gross - benefits its owner, but not in the use of other land May be sold to another Creation of Easements Grant or Reservation Grant occurs when a landowner expressly intends to convey an easement to someone else Reservation occurs when an owner sells land but keeps some right to enter the property Implication or necessity An easement by implication arises when an owner subdivides land in a way that clearly implies the creation of an easement in favor of the new parcels Easement by necessity - when the dominant tenement absolutely must make use of other property Prescription May arise when someone makes use of property belonging to another, if his use is: Open and notorious Adverse to the owners, and Continuous and uninterrupted for the number of years required by local statute Must satisfy each element Profit The right to enter land belonging to another and take something from it License The right to enter land belonging to another temporarily i.e. a ticket to a game lets your enter the premises temporarily Mortgage A security interest in real property Mortgagor - an owner who gives a security interest in property in order to obtain a loan Mortgagee - the party acquiring a security interest in property Lien - the right to foreclose on the property if the mortgagor fails to pay back the money borrowed Adverse Possession Allows someone to take title to land if she meets certain tests In most states, to gain ownership of land by adverse possession, the user must prove: Entry and exclusive possession Open and notorious possession A claim adverse to the owners, and Continuous possession for a statutory period Entry and Exclusive Possession User must take physical possession of the land and must be the only one to do so If the owner is still occupying the land, or if other members of the public share its use, there can be no adverse possession Open and notorious possession The user's presence must be visible and generally known in the area, so that the owner is on notice that his title is contested; ensures that the owner can protect his property by ejecting the user Someone making secret use of the land gives the owner no opportunity to do this, and hence acquires no rights in the land A claim adverse to the owner 43

User must clearly assert that the land is his Doesn't need to register a deed or take other legal steps, but he must act as though he is the sole owner If the user occupies the land with the owner's permission, there is no adverse claim and the user acquires no rights in the property To succeed, the user must protect his possession of the land against all others the way any normal landowner would Many states focus only on the adverse acts of the user: it is sufficient if his conduct indicates he is the sold owner, regardless of what he thinks Continuous possession for the statutory period Prescribe a period of years for continuous use of the land Most states now demand 10 years Rewards those who make use of land The use must be continuous Tacking - permits the user to add on to her years of occupancy any years certain predecessors were in possession; predecessor must have been in privity with the current user, meaning there was some legal relationship Ray v. Beacon Hudson Mountain Corp. Facts: In 1931 Rose Ray bought a cottage in a mountaintop resort town in the Adirondacks, at the same time agreeing to rent the land on which the structure stood Long-term lease required her to pay the real estate taxes and provided that when the tenancy ended, the landlord would buy back the cottage at fair market value In 1960, the landlord terminated the lease of everyone in the town, so all the residents packed up and left; never saw a penny when she died in 1962 Next year, Mt. Beacon Incline Lands Inc. bought all rights to the abandoned resort The son and daughter-in-law of Ray reenterd the cottage and used it one month/year every summer from 1963-1988; paid taxes, insured property, installed utilties and posted "no trespassing signs" In 1978, Beacon Hudson bought the resort in a tax foreclosure sale In 1988 Rays filed suit claiming title to the cottage by adverse possession; Beacon Hudson counterclaimed, seeking to eject the Rays; trial court ruled for the couple, appellate court reversed stating the couple had been absent too frequently to achieve adverse possession Issue: Did the Rays acquire title by adverse possession? Decision: Requirement of continuous possession is satisfied when the adverse claimaint's acts of possessing the property are consistent with acts of possession that ordinary owners of like properties would undertake Plaintiff's installation of utilities and overall preservation of the cotagge for the duration of the statutory period demonstrates continuous actual occupration of land by improvement Appellate court is reverse and Rays obtain title by adverse possession Land Use Regulation Nuisance law Nuisance - an unprivileged interference with a person's use and enjoyment of her property Courts typically balance the utility of the act that is causing the problem against the harm done to neighboring property owners Abatement - an order requiring the homeowner to eliminate the nuisance Zoning Zoning status are state laws that permit local communities to regulate building and land use Control many aspects of land development Variance - an exception granted for special reasons unique to the property

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Whether a board will grant a variance generally depends upon the type of the proposed building, the nature of the community, the reason the owner claims he is harmed by the ordinance, and the reaction of neighbors Eminent Domain The power of the government to take private property for public use Takings Clause - private property cannot be taken for public use without just compensation A "fair price" generally means the reasonable market value of the land If the property owner refuses the government's offer, the government will file suit seeking condemnation of the land, aka a court order specifying what compensation is just and awarding title to the government Landlord-Tenant Law Landlord - the owner of a freehold estate who allows another person temporarily to live on his property Tenant - a person given temporary possession of the landlord's property A freehold estate is the right to possess real property and use it in any lawful manner When an owner of a freehold estate allows another person temporary, exclusive possession of the property, the parties have created a landlord-tenant relationship Three Legal Areas Combined Lease - an agreement in which an owner gives a tenant the right to use property Reversionary interest - the right to possess the property when the lease ends Lease The statute of frauds generally requires that a lease be in writing At minimum, must state the names of the parties, the premises being leased, the duration of the agreement, and the rent Covenant - a promise by either the landlord or the tenant to do something or refrain from doing something Condition - allows for a landlord to evict a tenant if there is a violation Types of Tenancy 4 types of tenancy: tenancy for years, a periodic tenancy, a tenancy at will, and a tenancy at sufferance Difference is in how each terminates Tenancy for years Any lease for a stated, fixed period Even if its for a few months Terminates automatically when the agreed period ends Periodic tenancy A lease for a fixed period, automatically renewable unless terminated Example: Rent an apartment month to month Create a periodic tenancy if, when a tenancy for years expires, the tenant continues to pay rent and the landlord accepts it For a commercial property, new periodic tenancy is for the same period as the old tenancy for years, up to a maximum of one year Residential property renewed for a month Tenancy at will A tenancy with no fixed duration, which may be terminated by either party at any time Unusual tendencies Agreement is vague, with no specified rental period and with payment, perhaps, to be made in kind Tenancy at sufferance A tenancy that exists without the permission of the landlord, after the expiration of a true tenancy Not a true tenancy Landlord can evict the tenant or forcing the tenant to pay a use and occupancy fee for as long as she stays Elwell v. Minor Facts: Elwell orally agreed to rent an apartment in CT to Lucille Minor on a month-to-month basis 45

Her rent increased; she paid the original amount explaining she did not want to pay the increased rent this month but would pay the increase in later months Elwell rejected the payment Minor tendered the check a second time and Elwell returned it again Elwell told Minor to pay $650 or vacate; she did neither so Elwell began eviction proceedings (called "summary process") by serving a Notice to Quit for nonpayment of rent After additional negotiations failed, Elwell served a 2nd notice; at trial Minor argued that nonpayment of rent was an improper grounds for evicting a tenant at sufferance Issue: May a landlord evict a tenant at sufferance for non-payment of rent? Decision: Because Minor remained in possession of the premises without a new monthly contract, she should be treated as a holdover occupying the apartment without the legal right to do so (aka a tenant at sufferance) In this case, the defendant was not a tenant at will, because such a tenancy exists only when the occupation of the property is with the landlord's consent, continuing during the tenancy Once the lease terminated, Minor became a tenant at sufferance Nonpayment of rent is not a proper ground for the eviction of a tenant at sufferance because a tenant at sufferance is not required to pay rent, but only use and occupancy When 2 parties enter into a month-to-month lease, they don't ordinarily designate a definite date when the lease, by its own terms, will expire Once the agreement expires by operation of law, the tenant's obligation to pay rent transforms into an obligation of the premises; without an obligation to pay rent there can be no summary process for nonpayment of rent Proper statutory basis for pursuing summary process against a tenant who failed to pay a reasonable su for use and occupancy would be that the tenant originally had the right or privilege has terminated ; the second notice to quit cites improper grounds for the eviction of a tenant at sufferance; notice to quit is defective and deprives this court of subject matter jurisdiction in this summary process action Action is dismissed Landlord's Duties Duty to Deliver Possession The landlord's first important duty is to deliver possession of the premises at the beginning of the tenancy, that is, to make the rented space available to the tenant The "English rule" - obligates the landlord to remove the previous tenant in time for the new tenant to take possessions New tenant has 2 alternative remedies: May terminate the lease and sue the landlord for costs she incurs obtaining other accommodations, or May affirm the lease, refuse to pay rent for the period in which she cannot take possession, sue for the cost of other accommodations, and then take possession when the old tenant is finally evicted The "American Rule" - more favorable to the landlord Minority rule in this country Holds that the landlord has no duty to deliver actual possession of the premises If the previous tenant remains in possession, the landlord has not breached the lease New tenant generally has the power to act as a landlord toward the old tenant; new tenant may evict the old tenant and recover damages caused by her delay in leaving Alternatively, the new tenant may treat the holdover as a tenant at will for a new rental period and may charge the normal rent for that period Quiet Enjoyment All tenants are entitled to quiet enjoyment of the premises, meaning the right to use the property without the interference of the landlord Eviction - an act that forces a tenant to abandon the property Law implies the right of quiet enjoyment even if the lease has no covenant 46

Two types of eviction: actual and constructive Actual Eviction If a landlord prevents the tenant from possessing the premises, he has actually evicted her If a landlord simply waits until his tenants leave, changes the locks, he has breached their right of quiet enjoyment He would be liable for all expenses they suffer; may be liable for punitive damages Even a partial eviction is an interference with quiet enjoyment Constructive eviction If a landlord substantially interferes with the tenant's use and enjoyment of the premises, he has constructively evicted her Example: heating system fails during cold winter, landlord says too busy to fix so tenants move out; liable for all expenses they suffer To claim a constructive eviction, The tenant must vacate the premises Must also prove that the interference was sufficiently serious and lasted long enough that she was forced to move out Other interference A landlord's conduct may interfere with quiet enjoyment event when it's not so harmful as to force a constructive eviction Duty to Maintain Premises In most states, a landlord has a duty to deliver the premises in a habitable condition and a continuing duty to maintain the habitable condition Landlord's duty to maintain the property focuses on whether the property meets a particular legal standard Lease Generally obligates the landlord to maintain the exterior of any buildings and the common areas Building codes Mandate minimum standards for commercial and/or residential property Implied warranty of habitability Requires that a landlord meet all standards set by the local building code or that the premises be fit for human habitation Court considers the severity of the problems and their duration Rent abatement - a reduction in the rent owed Duty to Return Security Deposit Landlord must either return the security deposit soon after the tenant has moved out or notify the tenant of the damage and the cost of the repairs Landlords are often obligated to credit tenants with interest earned on the deposit Mishkin v. Young Facts: Colorado statute required a landlord either to return a security deposit or provide an accounting of why money was being withheld; had to do so within one month of the tenant's surrender of the property or up to 60 days if the lease permitted If the landlord failed to refund the money, the tenant, after giving 7 days' notice, could sue for treble damages; landlord could avoid the treble damages by refunding the deposit within those 7 days Mishkin leased an apartment from Young paying a security deposit of $1,625; lease state that the deposit would be returned no later than 45 days after the tenant moved out 48 days after leaving, Mishkin sent a demand for the deposit, notifying Young that in 7 days he would sue for treble damages 6 days later, Young gave Mishkin a statement detailing $1,574.60 worth of property damage along with a check for $50.40 47

Mishkin sued; trial court ruled that Young was entitled to withhold the money because of the damages; Mishkin appealed; appellate court ruled that the CO statute required the landlord to return the full deposit within the 7 day period; Young appealed Issue: May a landlord avoid the treble damages by accounting for the security deposit within 7 days of the tenant's notice to sue? Decision: Landlord forfeits all of the deposit if he fails to return the money or account for it within the statutory period Landlord may avoid treble damages only by returning the entire security deposit during the 7 days after a tenant's demand notice Does not give landlords a second chance to account for the deposit; full money actually belongs to the tenant Affirmed Final Word on security deposits In a commercial lease, the tenant may have less statutory protection but more bargaining power Tenant's Duties Duty to Pay Rent Rent - compensation paid by a tenant to a landlord Escalator clauses - a lease clause allowing the landlord to raise the rent for specified reasons i.e. a tax escalator Landlord's Remedies for Nonpayment of Rent Entitled to apply the security deposit to the unpaid rent May sue the tenant for nonpayment, demanding the unpaid sums, cost of collection, and interest May evict a tenant who has failed to pay Landlord must serve a termination notice on the tenant and wait for a court hearing At the hearing, must prove that the tenant has failed to pay rent on time; if the tenant has no excuse, court grants an order evicting him; order authorizes sheriff to remove the tenant's goods and place them in storage at tenant's expense Duty to Mitigate Mitigate damages - keep its losses to a minimum by promptly seeking another tenant Duty to Use Premises for Proper Purpose Tenant who engages in illegal acts on the leased property is subject to eviction, regardless of whether the lease mentions such conduct Duty Not to Damage Premises A tenant is liable to the landlord for any significant damage he causes to the property; not liable for normal wear and tear Landlord can collect on cost of repairs , either by using the security deposit or by suing; can seek to evict a tenant for serious damage to the property Tenant is permitted to make reasonable changes in the leased property so that he can use it as intended Fixture - an item of personal property that is permanently attached to real estate In commercial leases, it's common for tenants to install expensive equipment as part of their business trade fixtures Duty to not disturb other tenants May evict a tenant who unreasonably disturbs others The test is reasonableness Injuries Tenant's Liability A tenant is generally liable for injuries occurring within the premises she is leasing, whether that is an apartment, a store, or otherwise Landlord's liability Common law rules 48

Latent defects If the landlord knows of a dangerous condition on the property and realizes the tenant will not notice it, the landlord is liable for any injuries Common areas Usually responsible for maintaining the common areas and along with this obligation may go liability for torts Negligent repairs Even in areas where the landlord has no duty to make repairs, if he volunteers to do so and does the work badly, he is responsible for resulting harm Public use If meant for public purpose, landlord is generally obligated to repair any dangerous defects, although the tenant is probably liable as well To ensure that the general public can safely visit commercial establishments Modern Trend In many states, a landlord must use reasonable care to maintain safe premises and is liable for foreseeable harm Some imply a warranty of habitability, which mandates reasonable safe living conditions Exculpatory clauses A lease clause that relieves a landlord of liability for injuries Generally void in residential leases Chapter Conclusion Real property law is ancient but forceful. Although real property today is not the dominant source of wealth that it was in medieval England, it is still the greatest asset that most people will ever possess - and is worth understanding. When property is rented, a special relationship exists between landlord and tenant. Each has numerous obligations to the other. The current trend is clearly for expanded landlord liability, but how far that will continue is impossible to divine.

CHAPTER 44 PERSONAL PROPERTY AND BAILMENT 1119 - 1133 Introduction Personal property - all tangible property other than real property (real property - land and things firmly attached to it, such as buildings, crops, and minerals) All other physical objects are personal property - a bus, toothbrush, a share of stock Gifts Gift - a voluntary transfer of property from one person to another, without consideration Donor - person who gives property away Donee - a person who receives a gift of property A gift involves 3 elements: The donor intends to transfer ownership of the property to the donee immediately The donor delivers the property to the donee The donee accepts the property If all 3 elements are met, the donee becomes the legal owner of the property Intention to Transfer Ownership Donor must intend to transfer ownership to the property right away, immediately giving up all control of the item 2 important parts of this element: Donor's intention must be to transfer ownership: give title to the donee Donor must also intend the property to transfer immediately 49

(promises about future behavior are governed by contract law, and a contract is unenforceable without consideration) Revocable gift - governed by a special rule, and it not actually a gift Example: I'll give you this but if you act stupid, I'm taking it back Delivery Physical Delivery The donor must deliver the property to the donee Generally, involves physical delivery or by saying "I want you to have this forever" Constructive delivery A donor makes constructive delivery by transferring ownership without a physical delivery Only allowed by courts when physical delivery is impossible or extremely inconvenient Delivery to an agent Can deliver the property to an agent, either someone working for him or for the donee Property already in donee's possession No delivery is required and the donee need only demonstrate that the donor intended to transfer present ownership Inter Vivos Gifts and Gifts Causa Mortis Inter vivos - a gift made during the donor's life, with no fear of impending death It's absolute; both are healthy Gift causa mortis - a gift made in contemplation of approaching death Gift is valid if the donor dies as expected, but it is revoked if he recovers It is a revocable gift; since a gift causa mortis is conditional (upon the donor's death), the donor has the right to revoke it at any time before he dies If the donor recovers and does not die as expected, the gift is automatically revoked Acceptance Donee must accept the gift Her repudiation of the donor's offer means there is no gift, and she has no rights in the property Albinger v. Harris Facts: Michelle Harris and Michael Albinger lived together, on and off, for 3 years; relationship involved alcohol abuse and violence Albinger gave Harris a $29,000 engagement ring; the couple broke off their wedding plans because of emotional and physical turmoil Harris returned the ring, they reconciled and resumed their marriage plans, and Albinger gave his fiancee the ring again; same thing happened repeatedly for 3 years; each time Harris gave the ring back and each time they made up, he gave it back to her On one occasion, Albinger held a knife over Harris as she lay in bed, threatening to chop off her finger if she didn't remove the ring Criminal charges were brought (he beat her and forcibly removed the ring); ended their affair and Harris moved to Kentucky and took the ring Albinger sued for the value of the ringer; trial court found that the ring was a conditional gift, made in contemplation of marriage, and ordered Harris to pay its full value; she appealed Supreme Court had to decide, in a case of first impression, whether an engagement ring was given in contemplation of marriage Issue: Who owns the ring? Argument for Harris: Problem with calling the ring a "conditional gift" is that there is no such thing; elements of a gift are intent, delivery, and acceptance, and Harris has to prove all three A gift is not a contract, nor is it a loan Once a gift is accepted, the donor has no more rights in the property and may not demand its return 50

Argument for Albinger: All parties understand if engagement is called off: the ring is returned Harris always returned the ring until greed got the best of her and she fled to Kentucky Found Property The primary goal of the common law has been to get found property back to its proper owner, if possible The finder must make a good faith effort to locate the owner of the property and return the goods to him A second policy has been to reward the finder if no owner can be located 4 kinds of found property: Abandoned property Something the owner has knowingly discarded because she no longer wants it Generally finder is allowed to keep it But because the owner loses all rights in abandoned property, a court never presumes abandonment Finder must prove that the owner intended to relinquish all rights Lost property Something accidentally given up Finder has rights superior to all the world except the true owner If true owner doesn't come forward, finders keepers But if the finder has discovered the item on land belonging to another, the landowner is probably entitled to keep it Mislaid property Something the owner has intentionally placed somewhere and then forgotten Generally, the finder gets no rights in property that has simply been mislaid If the true owner cannot be located, the mislaid item belongs to the owner of the premises where the item was found Treasure trove Coins or currency concealed by an owner so long ago that it's likely the owner has died Finder can generally keep treasure trove Finding statutes - laws that govern found property; aka estray statutes Armorie v. Delamirie (1722) Facts: Armorie was one of many English chimney sweeps forced to climb the narrow flues and do the cleaning Armorie found a jeweled ring; took it to a local goldsmith The goldsmith's apprentice, removed the jewels and pretended to weigh it; gave Armorie a crap offer; Armorie refused the offer and demanded the ring be returned; apprentice gave him the ring but without the jewels Issue: Did the chimney sweep have a legal right to retain possession of the found jewels? Decision: The finder of a jewel, though he does not by such finding acquire an absolute property or ownership, has such a property as will enable him to keep it against all but the rightful owner As to the value of the jewel, the Chief Justice directed the jury that unless the defendant did produce the jewel, and shew it not to be of the finest water, they should presume the strongest against him, and make the value of the best jewels the measure of their damages: which they accordingly did Accession Occurs when one person uses labor, materials, or both to add value to personal property belonging to another person Generally occurs by agreement Sometimes one party makes accessions without agreement; if the improvements can be "undone" without damage to the property, then the improver must do that 51

Wrongful accessions If the improver knows he is making accessions without authority, the owner may generally take the improved property without paying for the work done Mistaken accessions If the improver mistakenly believes he is entitled to add accessions, the owner probably has to pay for the increased value Bailment Bailment - the rightful possession of goods by one who is not the owner, usually by mutual agreement between the bailor and bailee Bailor - one who delivers the goods Bailee - one in possession of goods Example: give your suitcases to airline, you are the bailor and the airline is the bailee Parties generally create a bailment by agreement Involuntary bailment - aka a constructive, a bailment that occurs without an agreement between the bailor and bailee Ex: find a wristwatch in your house that you know belongs to a friend Control To create a bailment, the bailee must assume physical control of an item with intent to possess Bailee may be liable for loss or damage to the property, and so it is not fair to hold him liable unless he has taken physical control of the goods, intending to posses them Rights of the Bailee The bailee's primary right is possession of the property Anyone who interferes with the bailee's rightful possession is liable to her Even a bailor is liable if he wrongfully takes back property from a bailee Bailor must abide by the agreement The bailee is typically, though not always, permitted to use the property Some bailees have no authority to use the goods Using a storage unit Duties of the Bailee The bailee is strictly liable to redeliver the goods on time to the bailor, or to whomever the bailor designates Strict liability means there are virtually no exceptions Due care Bailee is obligated to exercise due care Level of care required depends upon who receives the benefit of the bailment 3 possibilities: Sale benefit of bailee If the bailment is for the sole benefit of the bailee, the bailee is required to use extraordinary care with the property The bailor loans something for free to the bailee Since the bailee is paying nothing for the use of the goods, most courts consider her the only one to benefit from the bailment Mutual benefit The bailee must use ordinary care with the property Sole benefit of bailor When the bailment benefits only the bailor, the bailee must use only slight care This kind of bailment is called gratuitous bailment, and the bailee is liable only for gross negligence Burden of proof In an ordinary negligence case, the plaintiff has the burden of proof to demonstrate that the defendant was negligent and cause the harm alleged 52

In bailment cases, the burden of proof is reversed Once the bailor has proven the existence of a bailment and loss or harm to the goods, a presumption of negligence arises, and the burden shifts to the bailee to prove adequate care Johnson v. Weedman Facts: Johnson left his horse with Weedman, paying him to board and feed the animal Johnson did not grant Weedman permission to ride the horse, but Weedman took it out for a 15 mile ride; later that day the horse died; trial court found that Weedman had not abused the animal and that the ride had not caused the horse's death Court did not grant damages to Johnson and Johnson appealed Issue: Should Weedman pay Argument for Johnson: Weedman was in possession only to feed him and see to his basic needs Made personal use of personal property that was in no way necessary Client must be compensated Argument for Weedman: Had a legal right to possession of the horse Riding the horse was not a substantial abuse of his rights as bailee; horse was returned in good condition Death of horse was coincidental Exculpatory Clauses A contract clause that attempts to relieve one of the parties from future liability Validity of clause depends on several factors: If the bailor is a corporation and it has bargaining power roughly equal to the bailee's, a court will probably enforce an exculpatory clause Generally unenforceable if it attempts to exclude an intentional tort or reckless behavior If the bailor is a consumer, the clause stands on shaky ground because judges generally presume the parties have unequal bargaining power Tannebaum v. New York Dry Cleaning Inc. Facts: Tannenbaum picked up his $160 shirt at the dry cleaners, he found it badly torn; he sued claiming negligence; cleaners denied causing the tear, additionally the cleaner claimed that even if the company damaged the shirt, an exculpatory clause on the back of the ticket limited its liability to 10 times the cleaning fee of $2 or $20 Issues: Was the cleaner negligent? If so, did the exculpatory clause limit the company's liability? Decision: Not reasonable he should recover only $20 for destruction of $160 shirt Case is one of bailment for hire Defendant denied that the shirt had been damaged while in its care, but did not offer, in the alternative any explanation negating the presumption of negligence; accordingly liable for negligence, unless its disclaimer is effective Limitation clause very difficult to see Court finds that claimaint was not aware of, and did not assent to be bound by the limitation clause Claimaint is awarded judgment in the amount of $160 plus interest and costs Rights and Duties of the Bailor The bailor's rights and duties are the reverse of the bailee's Bailor is entitled to the return of his property on the agreed-upon date He is also entitled to receive the property in good condition and to recover damages for harm to the property if the bailee failed to use adequate care Liability for defects Bailor is potentially liable for known or even unknown defects in the property 53

If the bailment is for the sole benefit of the bailee, the bailor must notify the bailee of any known defects In a mutual-benefit bailment, the bailor is liable not only for known defects but also or unknown defects that the bailor could have discovered with reasonable diligence If the bailor is in the business of renting property, the bailment is probably subject to implied warranties (exist whether the parties say anything about them or not) Common carriers and contract carrier Common carrier - a company that transports goods and makes its services regularly available to the general public Strictly liable for harm to the bailor's goods Bailor needs only to establish that it delivered property to the carrier in good condition and that the cargo arrived damaged; carrier then liable unless it can show that it was not negligent and that the los was caused by an act of God, an act of a public enemy, an act of the bailor itself an act of public authority, or the inherent nature of the goods - defenses are difficult to prove, a common carrier is liable for harm to the property Allowed to limit its liability by contract A carrier is a company that transports goods for others; its a bailee of every shipment entrusted to it A contract carrier does not make its services available to the general public but engages in continuing agreements with particular customers Does not incur strict liability Can escape liability by demonstrating that it exercised due care of the property Innkeepers Hotels, motels, and inns frequently act as bailees of their guests' property Most states have special innkeeper statutes that regulate liability Some impose absolute limit on a hotel's liability; others require guests to leave valuables in the inn's safe deposit box GNOC Corp. v. Powers Facts: Powers liked to wager; he and a friend went to Hilton Casino in Atlantic City; his 4th visit to hotel; clearly marked signs that said hotel was not responsible for valuables or other property left in room Powers won $76,000; placed his cash, chips, and a money clip on the dresser; at 4:19am the front desk issued a second key to Power's room to an unknown person who stole his stuff Powers ended up $25,000 in debt to the casino, and when he refused to pay, the hotel sued Powers claimed that the Hilton owed him $76,000 for the stolen merchandise; trial judge ruled in favor of the Hilton; Powers appealed Issue: Did the innkeeper statute protect the hotel? Decision: Defendant: casino chips are not specifically enumerated in the innkeeper statute and are not items of value as they are merely an accounting mechanism to evidence a debt owed by the casino does not apply to them; asserts that the chips do not "belong to guests" But the list is not exhaustive Hilton complied with the statutory notice requirements Affirmed

CHAPTER 45 PLANNING FOR THE FUTURE: WILLS, TRUSTS, AND INSURANCE 1140 - 1162 Introduction to Estate Planning 54

Definitions Estate planning - the process of giving away property after (or in anticipation of) death Estate - the legal entity that holds title to assets after the owner dies and before the property is distributed Decedent - the person who has died Testator or testatrix - someone who has signed a valid will Intestate - to die without a will Heir - someone who inherits from a decedent who died intestate Devisee - someone who inherits under a will Probate - the process of carrying out the terms of a will Executor or executrix - a personal representative chosen by the decedent to carry out the terms of the will Administrator or administratrix - a personal representative appointed by the probate court to oversee the probate process for someone who has died intestate (or without appointing an executor) Grantor or settlor - someone who creates a trust Donor - someone who makes a gift or creates a trust Purpose Estate planning has two primary goals To ensure that property is distributed as the owner desires, and To minimize estate taxes Probate law Only the states have probate codes to regulate the creation and implementation of wills and trust Codes vary from state to state Wills A will is a legal document that disposes of the testator's property after death Can be revoked or altered at any time until death Should have a will to: Ensure that their assets are distributed in accordance with their wishes Select a personal representative to oversee the estate; if the decedent does not name an executor in a will; the court will appoint an administrator Avoid unnecessary expenses Provide guardians for minor children Requirements for a valid will Generally speaking, a person may leave his assets to whomever he wants However, the testatrix must be: Of legal age Of sound mind: understand what a will is, more or less what she owns, who her relatives are, and how she is disposing of her property Acting without undue influence - means that one person has enough power over another to force him to do something against his free will Legal technicalities Must be in writing Testator must sign it or direct someone else to sign it for him, if he's too weak Generally, two witnesses must also sign the will A witness may not inherit under a will Holographic Will A will that is handwritten signed by the testator, but not witnessed Must be written in a testor's own handwriting - it cannot by typed Nuncupative will An oral will To be valid, testatrix must know she is dying, there must be 3 witnesses, and these witnesses must know that they are listening to her will 55

Work only for personal property, not for real estate Spouse's share Forced share - the percentage of a decedent's estate that spouse is entitled to claim under state law; aka statutory share In community property states, a spouse can override the will and claim one-half of all marital property acquired during the marriage, except property that the testator inherited or received as a gift If a couple has been married for many years and has substantial assets, it can very difficult to sort out what is and is not community property Children's share Parents are not required to leave assets to their children They may disinherit their children for any reasons Pretermitted child - a child who is left nothing under the parent's will Law presumes pretermitted child was omitted by accident unless the parent clearly indicates in the will that he has omitted the child on purpose; must either leave her some nominal amount, such as $1, or specifically write in the will the omission was intentional If a pretermitted child is left out by accident, is generally entitled to the same share she would have received if her parent had died intestate - without a will Issue - a person's direct descendants such as children and grandchildren Per stirpes - each branch of the family receives an equal share Per capita - each heir receives the same amount In Re Estate of Josiah James Treloar, Jr. Facts: His first will left his estate to his wife unless she died before he did, in which case one piece of land was to go to his daughter Evelyn, another to his son Rodney, and the rest of his estate was to be divided equally among Evelyn, Rodney, and another daughter Beverly After Evelyn died, Josiah executed a new will; gave his lawyer a copy of the old will with handwritten changes including her name crossed out; new will left the estate to Rodney and Beverly equally; Evelyn's children and her husband, Leon, got nothing although Leon was named as executor - referred to him as my son-in-law Under NH law, all issue (including children and grandchildren) can qualify as pretermitted heirs (forgotten in the will); they are therefore entitled to a share of his estate Josiah's attorney was serving as executor (not Leon); when he refused to pay the children, they sued Issue: are Evenlyen's children entitled to a share of Josiah's estate? Decision: Purpose is to prevent a mistake or unintended failure by the testator to remember the natural object of his or her bounty To be a pretermitted heir, the child must not be named in the will, or be a devisee or legatee under the will The executor asserts that, although the will names neither Evelyn nor her children, there are sufficient indirect reference to Evenly to satisfy the statute Disagree with the executor that we must read the wills together; new will stands on its own Used "son in law" to identify executor not in a bequest Evelyn's children are pretermitted heirs Amending a Will A testator can generally revoke or alter a will at any time prior to death Revoke a will by destroying it, putting an x through it, writing "revoked", signing a new will, execute an amendment (codicil) Codicil - an amendment to a will Must meet all requirements of a will Under UPC, divorce or annulment cancels the ex-spouses inheritance under a will Intestacy 56

When there is no will Typically goes to children and grandchildren Power of attorney A document that permits the attorney-in-fact to act for the principal; need not be a lawyer Durable power is valid even if the principal can no longer make decisions for herself Immediate power becomes effective when signed, a springing power is effective at some time in the future, typically when the principal becomes incompetent and is no longer able to manage his affairs Probate Probate court appoints an adminstrator to fulfill same functions if the decedent does not select an executor Typically given 1 - 5% of estate's value as a fee Property not transferred by will A will does not control the distribution of joint property, retirement benefits, or life insurance Anatomical gifts Uniform Anatomical Gift Act (UAGA) allows an individual to indicate her desire to be a donor either by putting a provision in her will or by signing an organ donation card in the presence of two witnesses Living wills In the event that a person is unable to make medical decisions, this document indicates her preferences and may also appoint someone else to makes these decisions for her; aka advance directive Ultimately, the Supreme Court upheld a law that family members cannot choose to discontinue treatment for an incompetent person unless there is clear and convincing evidence the patient would have made that choice herself Health care proxy - someone who has the authority to make health care decisions for a person who is incompetent Assisted suicide - the process of hastening death for a terminally ill patient at the request of the patient Trusts An entity that separates the legal and beneficial ownership of assets Involves 3 people: The grantor (aka settlor or donor) - who creates and funds it The trustee - who manages the assets; holds legal title The beneficiary - who receives the financial proceeds; holds equitable title 4 requirements for establishing a trust: Legal capacity - of legal age and sound mind Trustee - grantor must appoint at least one trustee (who may be the grantor himself); trust does not end if the appointed trustee dies or resigns Beneficiary - must have specific beneficiaries, although it need not list them by name; i.e., class "living children of grantors" Trust property - grantor must transfer specific assets to the trust, although these assets can be nominal Advantages and Disadvantages Advantages Control Caring for children Tax savings Privacy (wills become a matter of public record) Probate (heirs may not receive assets for some time as it goes through probate process) Protecting against creditors (asset protection trusts) Disadvantage Expense - trusts are very complex; legal fees, paying trustees Types of trusts Living trust A trust established while the grantor is still alive 57

Inter vivos trust Grantor serves as trustee during his lifetime; Maintains total control over assets and avoids trustee's fee All the assets stay in the trust and avoid probate Most are revocable - a trust that can be terminated or changed at any time Testamentary Trust One that goes into effect when a grantor dies Is irrevocable Grantor's property must first go through probate on its way to the trust Trust administration In carrying out the terms of the trust, the trustees have a fiduciary duty to the beneficiary, which includes: A duty of loyalty - must put the interests of the beneficiaries first A duty of care - must act as a reasonable person would when managing the assets of another A trustee is liable to the beneficiaries of the trust if she breaches her duty Paradee v. Paradee Facts: Charles Paradee, Senior had a son, Junior, and a grandson Trey; Senior remarried after 1st wife died; Junior and 2nd wife Eleanor hated each other so Junior and Senior stopped their relationship; but Senior maintained a loving relationship with Trey Senior created an irrevocable trust for Trey; $366,000 which it used to buy an insurance policy on the lives of Senior and Eleanor; once both died, Trey would get $1.7Million; Sterling was the initial trustee and Trey could e the trustee when he turned 30 They sent a letter to Sterling to revoke the Trust; family lawyer said it's irrevocable; but there was a right to loan the assets, but had to be the same as an arms-length transaction; Sterling borrowed money from the insurance company with the policy as security and loaned it to Senior and Eleanor with very favorable terms Senior died; Sterling made no effort to collect the loan; Trey turned 30 but Sterling did not tell him he was entitled to be trustee; When Sterling died, Eleanor appointed herself trustee; she stopped paying interest to the Trust, which meant it could not pay what it owed to the insurance company and the policy lapsed When trey finally found out about the Trust, he filed suit against Eleanor alleging that she had violated her fiduciary duties and had aided and abetted Sterling in the violation of his Issue: Did Elanor violate her fiduciary duty? Is she liable for aiding and abetting Sterling? Decision: Family lawyer testified: Eleanor consciously, intentionally, and vengefully refused to take any action to protection or preserve the Policy because she didn't want Trey to benefit To prevail on claim for aiding and abetting a breach of fiduciary duty, need to prove The existence of a fiduciary relationship That the fiduciary breached his duty That the non-fiduciary defendant knowingly participated in the breach, and Damages resulting from the concerted action of the fiduciary and the non-fiduciary Eleanor induced Sterling to breach his fiduciary duties by taking advantage of his primary loyalty to the Paradees; liable to the same extent as Sterling would have been had he not passed away Judge: I award damages of [what the policy would have been worth if it had not lapsed] Trey asks Eleanor be ordered to pay his attorney's fees and expenses; having intentionally destroyed the Trust's value, Eleanor must bear the cost of the remedying her breaches of fiduciary duty Termination A trust ends upon the occurrence of any of the events: On the date indicated by the grantor 58

If the trust is revocable, when revoked by the grantor; even if irrevocable the grantor and all beneficiaries can agree to revoke it When the purpose of the trust has been fulfilled Rule Against Perpetuities - provides that a trust must end within 21 years of the death of some named person who is alive when the trust is created; now many states allow dynasty or perpetual trusts that can last forever Introduction to Insurance Person - an individual, corporation, partnership, or any other legal entity Insurance - a contract in which one person, in return for a fee, agrees to guarantee another against loss caused by a specific type of danger Insurer - the person who issues the insurance policy and serves as guarantor Insured - the person whose loss is the subject of the insurance policy Owner - the person who enters into the insurance contract and pays the premiums Premium - the consideration that the owner pays under the policy Beneficiary - the person who receives the proceeds from the insurance policy Insurance Contract An insurance policy must meet all the common law requirements for a contract Must be an offer, acceptance, and consideration; legal capacity for the owner Offer and acceptance The purchaser of a policy makes an offer by delivering an application and a premium to the insurer Insurance copmany can accept by oral notice, by written notice, or by delivery of the policy; also ha a 4th option -a written binder Binder - short document acknowledging receipt of the application and premium; indicates the policy is in temporary effect but does not constitute final acceptance Limiting Claims by the Insured Insurable interest An insurance contract is not valid unless the owner has an insurable interest in the subject matter of the policy Rules on insurable interest: Definition A person has an insurable interest if she would be harmed by the danger that she has insured against Insurable interest - someone would suffer a loss if the insured event occurs Amount of loss Insurable interest can be no greater than the actual amount of loss suffered Life insurance A person always has an insurable in his own life and the life of the spouse or fiancee; parents and minor children also have an interest in someone who owes them money Work relationships Some companies sometimes by key person life insurance on their officers as compensation if they were to die Misrepresentation Insurers have the right to void a policy if, during the application process, the insured makes a material misstatement or conceals a material fact Is voidable whether the misstatement was oral or in writing; and whether it was intentional or unintentional Missrepresentation can be material even if its not related to the actual cause of death Bad Faith by the Insurer Insurance policies often contain a covenant of good faith and fair dealing An insurance company can violate the covenant by Fraudulently inducing someone to buy a policy 59

Refusing to pay a valid claim, or Refusing to accept a reasonable settlement offer that has been made to an insured When it violates the covenant, it becomes liable for compensatory and punitive damages Fraud A number of insurance companies have paid serious damages to settle fraud charges involving the sale of life insurance Refusing to pay a Valid Claim Damage awards are often sizeable when an insurance company has refused to pay a legitimate claim Goodson v. American Standard Insurance Company of Wisconsin Facts: Goodson and her two children were in a car accident while driving a car owned by Chet Weber; he was insured by American Standard To treat injuries, sought care from a chiropractor with bills about $8000 which were submitted to American Standard Company came up with many excuses to not pay Filed suit against insurance company alleging bad faith breach of insurance contract Delay in payment didn't cost money but had cause emotional distress Jury awarded $75,000 in actual damages and an additional $75,000 in punitive damages; appeals court overturned the verdict; Goodson appealed to the state Supreme Court Issue: Can Goodson recover damages for emotional distress without showing any economic loss caused by American Standard's delay in paying her claim? Decision: Insured must show that a reasonable insurer under the circumstances would have paid or otherwise settled the claim Must establish the insurer's breach was accompanied by circumstances of fraud, malice, or willful and wanton conduct Punitive damages award cannot exceed the amount of actual damages and may be increased or decreased by the court Goodson proved to the jury that she suffered emotional distress as a result of this delay The fact that an insurer finally pays in full does not erase the distress caused by the bad faith conduct Reverse the court of appeals and remand the case to the court with instructions to reinstate the trial's court judgment entered on the jury verdict Refusing to accept a settlement offer Violates the covenant of good faith and fair dealing when it wrongfully refuses to settle a claim Types of Insurance Property insurance - aka casualty insurance; covers physical damage to real estate, personal property, or inventory from causes such as fire, smoke, lightning, wind, riot, vandalism, or theft Life insurance - provides for payments to a beneficiary upon the death of the insured Term insurance simplest, cheapest life insurance option Purchased for a specific period Whole life insurance Whole life or straight life - designed to cover the insured for this entire life Disadvantages: Investment returns from the savings portion of whole life insurance have traditionally been mediocre A significant portion of the premium for the 1st year goes to pay overhead and commissions Unless the customer holds a policy for about 20 years, it will typically generate little cash value Universal life Flexible combination of whole life and term 60

Annuities Payment to a beneficiary during his lifetime Deferred annuity contract - the owner makes a lump-sum payment but receives no income until some later date Health Insurance Traditionally are pay for service - insurer pays for virtually any treatment that any doctor orders Policyholders have the largest possible choice of doctor and treatment Health maintenance organizations (HMOS) - patient can be treated only doctors in the organization unless there is some extraordinary need for an outside specialist Disability insurance Replaces the insured's income if he becomes unable to work because of illness or injury Liability insurance Reimburses the insured for any liability she incurs by accidentally harming someone else Those injured on property owned by the insured Injured by the insured away from home or business Those whose property is damaged by the insured Business: professional malpractice, product liability, employment practices liability insurance Automobile insurance Collision - covers the cost of repairing or replacing a car this is damaged in an accident Comprehensive - covers fire, theft and vandalism But not collision Liability - covers harm the owner causes to other people or their property - such as their bodies, cars, or stone walls; most states require liability insurance Uninsured motorist covers the owner and anyone else in the car who is injured by an uninsured motorist

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