(Paralegal) Holder in Due Course

Holder in Due Course

In our case study, Bridezilla Wedding Planning has issued two checks totaling $150,000 to BabyCakes Bakery for wedding cakes. BabyCakes endorsed the checks to Shark & Shyster law firm to pay for a retainer. Bridezilla suffered a business failure, and, as it had not received all the wedding cakes it had ordered, it stopped payment on the checks. Shark & Shyster claims to be a holder in due course and demands payment. An equipment provider disputes Shark & Shyster’s claim on the check, and asserts its interest in the checks thusly: Shark & Shyster–say the equipment provider–has not, in fact, given value for the Bridezilla checks, and thus is not a holder in due course. We are asked to determine who is correct: is Shark & Shyster a holder in due course?

The relevant article in the Uniform Commercial Code is § 3-102. A holder in due course (HDC) is anyone or any business entity which has possession of (is a “holder” of) a check (or promissory note, or any other legitimately negotiable instrument) which was accepted in “good faith” (holder has no reason to suspect, for example, that a check is overdue, has already been dishonored (example: a bank may have previously refused to honor it if the account it would draw from was already overdrawn or closed), non-negotiable, or forged, which may have a claim on it from another party or parties (see §§ 3-305(a), 3-306), or which is otherwise suspect) in exchange for services or goods of value (Malin, 2012). Rules governing HDC status are intended to protect the purchaser of a debt, typically a third party, from any legal liability or debt resulting from any dispute between the parties associated with the original transaction; a HDC can demand payment from the original drafter of the check (or note, et cetera) (USLegal, 2012).

In our case study, do Shark & Shyster have a claim? UCC § 3-102 requires that a HDC fulfill all the above guidelines (Cornell, n.d.). Shark & Shyster can argue that they were unaware of any problems with the negotiability or authenticity of the checks, so they meet that requirement. Further, Shark & Shyster can also argue that they accepted the checks from BabyCakes in good faith as a payment towards a retainer, and there does not appear to be anything untoward or illegal about the transfer of endorsed checks from BabyCakes signed over to Shark & Shyster, so Shark & Shyster can also argue that this requirement has been met. The next requirement is more complicated: has Shark & Shyster truly given “good value” for those checks?

In Carter & Grimsley v. Omni Trading, Inc., the situation was similar. Omni Trading paid Country Grain two checks for purchased grain. Country Grain endorsed those checks to Carter & Grimsley as a retainer for future legal services. Country Grain then suffered a business failure. Omni stopped payment on the checks because it had not received all the grain that the checks were intended to pay for. The Illinois Department of Agriculture professed an interest in the checks to repay a debt incurred by Country Grain, but Carter & Grimsley claimed to be a HDC. The court ruled in favor of the Department of Agriculture, ordering that the disputed funds be transferred to them. Carter & Grimsley appealed and lost the appeal.

The Court explained that there were no precedent-setting cases in Illinois where UCC § 3-303(a) had been interpreted to include retainers: “an executory promise is not value” (Black, 1999). Carter & Grimsley had not yet performed any legal services for Country Grain. One justice, P. J. Holdridge, dissented, citing Corti v. Fleisher, 93 Ill. App. 3d 517 (1981) and claiming that a payment of a fee or retainer creates a relationship between an attorney and a client, and Holdridge felt that the agreement to perform future legal services had value.

In Coventry Care, Inc. v. United States of America, the Internal Revenue Service (IRS) asserted that it was a HDC of a $35,000 note assigned to it by the CEO of Contemporary Institute, Inc., Robert C. Braumiller.  Coventry issued two promissory notes totaling $55,000 to Contemporary Institute as part consideration for purchase of a subsidiary of Contemporary. Contemporary sent the $35,000 check to the IRS and $20,000 to Western Pennsylvania National Bank (WPNB) to pay a debt to the bank. WPNB assigned the $20,000 note back to Contemporary, and Contemporary passed the note on to United Professional Data Processing (UPDP), which in turn passed the note to David Sage, Inc.

United had possession of the $20,000 note when the IRS and neglected to admit to this when the IRS asked for $10,000 on behalf of Contemporary. Sage asserted that it had promised United a 25% interest in a future not-yet-realized business venture. About a year later, Sage’s venture became Energy Management Corporation (Energy), but, at the time the dispute was tried in court, United had not yet received any stock of Energy, nor asked for the promised consideration. Because Sage had not yet provided “good value,” the IRS was found to be a HDC of the $35,000 note, and Sage was found not to be a HDC of the $20,000 note (the court cited 26 U.S.C. § 6323(b)(1)(A) or 26 U.S.C. § 6323(h)(6)). The court awarded the IRS $51,867.10; a future hearing would be required to determine the “priority of other claimants” (Knox, 1973).

In Fernandez v. Cunningham, Sam Kay gave a promissory note for $220,000 to Investments, S. A., Inc., which endorsed the note. Cunningham & Weinstein, law partners, alleged that they were HDCs of the note and that they had made a demand for payment but were denied. Sam Kay died and Marilyn Kay Fernandez was appointed administratrix of his estate; she objected to Cunningham & Weinstein’s claim, denying they were HDCs, and noting that they had failed to provide evidence that they had performed legal services for Kay.

The first court found for Cunningham & Weinstein, but the appellate court overturned this decision. The court found that the law partners had not provided “good value” for the note, as they failed to provide evidence of services provided to the late Kay (Carroll, 1972).

In Korzenik v. Supreme Radio, Inc., Korzenik and another law partner received notes “in the form of trade acceptances” as a retainer from Supreme Radio for “services to be performed.” Once again, the courts held that although Korzenik et al had spent much of the retainer, it had not provided “good value” (per the guidelines of § 3-303(a); nor had Korzenik made “an irrevocable commitment to a third person within § 3-303(c)”) to Supreme Radio and thus were not HDCs (Whittemore, 1964).

The equipment provider can thus argue that Shark & Shyster have not, in fact, given “good value”. The original check was issued by Bridezilla to pay for cakes, and though it is not Shark & Shyster’s fault that BabyCakes failed to deliver all the cakes Bridezilla paid for, the fact remains that no goods of value were ever furnished in exchange for those checks. Shark & Shyster did not provide any goods of value to Bridezilla in exchange for those checks either, unlike the equipment provider, which apparently did. Shark & Shyster also did not acquire the checks as a debtor or payee of Bridezilla, and, as far as we are told, had no prior business dealings with Bridezilla, and thus no claim on any payments from Bridezilla to satisfy a debt incurred by the wedding planning company. Shark & Shyster thus had no contract or invoice or bill directly connected with Bridezilla that would compel Bridezilla to pay the law firm for anything.

Although BabyCakes and Shark & Shyster may have had a business arrangement, assumed due to BabyCakes paying Shark & Shyster a retainer (in other words, a fee to ensure that a representative attorney from Shark & Shyster would handle a legal matter for BabyCakes), a retainer is not the same as a bill for services rendered. A retainer is given to a law firm in exchange for the firm’s promise to perform legal services in the future. Shark & Shyster has not, as far as we can tell, performed those services for BabyCakes yet. A promise to perform is of arguable value to the law firm since they place a price on retainers, but it has no actual value until the promise is kept and services provided. Therefore, Bridezilla, BabyCakes and the equipment provider can all argue that Shark & Shyster has not provided “good value” for the checks, and is thus not, by the guidelines in the UCC, a HDC.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Cornel University Law School, Legal Information Institute. (n.d.). U.C.C. – ARTICLE 3 – NEGOTIABLE INSTRUMENTS. PART 3. ENFORCEMENT OF INSTRUMENTS. § 3-302. HOLDER IN DUE COURSE. Retrieved from http://www.law.cornell.edu/ucc/3/3-302.html

Cornel University Law School, Legal Information Institute. (n.d.). U.C.C. – ARTICLE 3 – NEGOTIABLE INSTRUMENTS. PART 1.  GENERAL PROVISIONS AND DEFINITIONS. Retrieved from http://www.law.cornell.edu/ucc/3/article3.htm

USLegal. (2012). Holder In Due Course. Retrieved from http://definitions.uslegal.com/h/holder-in-due-course/

Columbia Law Review Association, Inc. (no author cited). (1968). Third Party Irrevocable Commitments as Value for a Holder in Due Course (originally published in the Columbia Law Review. Vol. 68, No. 3 (Mar., 1968), pp. 588-595). Retrieved from: http://www.jstor.org/stable/1120900

Gallinger, G. W., & Poe, J. B. (1995). Essentials of Finance: An Integrated Approach. Englewood Cliffs, NJ: Prentice Hall (excerpt). Retrieved from http://www.enotes.com/negotiable-instruments-reference/negotiable-instruments

Malin, M. (2012). What is a Holder in Due Course and Why Should You Care? Retrieved from http://www.buteralaw.com/newsletters.asp?c=46&id=313

Black, Judge B. W. (Court of Appeals, Third Appellate District). (1999). Carter & Grimsley v. Omni Trading, Inc., # 3-98-0483. Retrieved from http://law.justia.com/cases/illinois/court-of-appeals-third-appellate-district/1999/3980483.html

Knox, District Judge (United States District Court, W. D. Pennsylvania). (1973, November 1). COVENTRY CARE, INC. v. UNITED STATES: 366 F.Supp. 497, 501-02. Retrieved from http://www.leagle.com/xmlResult.aspx?page=12&xmldoc=1973863366FSupp497_1797.xml&docbase=CSLWAR1-1950-1985&SizeDisp=7

Carroll, Judge (District Court of Appeal of Florida, Third District). (1972, October 24). Fernandez v. Cunningham, 268 So. 2d 166, 169. Retrieved from http://www.leagle.com/xmlResult.aspx?xmldoc=1972434268So2d166_1408.xml&docbase=CSLWAR1-1950-1985

Whittemore, Judge (District Court of Western Hampden, Massachusetts). (1964, April 10). ARMAND A. KORZENIK & another vs. SUPREME RADIO, INC., 197 N.E.2d 702, 703-04. Retrieved from http://masscases.com/cases/sjc/347/347mass309.html

 

(Paralegal) Forged “For Deposit Only” Endorsed Checks: Who Is Responsible?

 

 

 

 

Forged “For Deposit Only” Endorsed Checks: Who Is Responsible?

In our case study, we are asked to review Qatar v. First American Bank of Virginia, 1995 and answer the following:

1)      Is a bank liable to a customer who endorses a check “for deposit only into account [number]” if the check is deposited into the wrong account?

2)      Is a bank liable if a customer’s endorsement simply says “for deposit only”?

3)      Would any account qualify to satisfy the endorsement?

4)      Would any bank qualify?

An employee, Bassam Salous, the chief accountant at Qatar’s Ministry of Education’s Office of Cultural Attache (OCA), defrauded his employer by creating false invoices and cashing OCA checks to “pay” the fake invoices. The checks Salous presented at the banks (and for which the banks debited Qatar’s account) took four different forms (and included checks made out to corporations rather than individuals):

• A forged fake payee’s signature, a check indorsed “in blank” (UCC § 3-204(2) makes this legally payable to the bearer).
• A forged fake payee’s signature, with “For Deposit Only” stamped on the check
• A forged fake payee’s signature, with “For Deposit Only” stamped on the check with Salous’ handwritten personal bank account number
• No signature at all

From 1986 until 1992, when his scheme was uncovered, Salous deposited over a million dollars into his personal accounts at several banks (including First American Bank of Virginia).

Qatar sued the depository banks for conversion, meaning they were alleging that the banks used Qatar’s property improperly; the acceptance of the fraudulent checks (and the subsequent transfer of Qatar’s funds into Salous’ personal accounts) may have been legal, but by refusing to reimburse Qatar’s funds once the fraud was uncovered and once Qatar demanded its funds returned (Qatar argues) is conversion.  (If found liable, the banks could be forced to pay Qatar damages: not only the full amount of the stolen funds but also any interest that Qatar lost once the money was removed from its account.)

The banks, in response, cited a pre-1993 version of UCC § 3-405 — VA Code, Title 8.3, as it existed prior to the January 1, 1993 amendments (District Judge Ellis, 1995) – which would leave Qatar, as Salous’ employer (and thus, ostensibly, in a better position to monitor whether his activities were legitimate and as desired or not), holding the bag for not catching Salous’ fraud sooner.

Predictably, Qatar disagreed. Yes, UCC § 3-405 does hold that even a check with a forged signature can be considered “effective” and negotiable by a bank, but, Qatar argued, the banks did not do due diligence when they failed to respect restrictive endorsements (like “For Deposit Only”) and, Qatar alleges, when the banks failed to act in a “commercially reasonable manner.”

The banks (First American et al) objected, asserting that Qatar, as drawer, should not be able to sue a depository bank for conversion but must file against any drawee banks, and that UCC § 3-405 placed liability for an employee forging employer checks solely on the employer (here, that would mean that Salous’ fraud would be solely Qatar’s problem, not the banks’).

First American et al also cited Western Assurance Co. v. Star Financial Bank of Indianapolis in defense, claiming that they should not be liable because they allegedly obeyed the restrictive endorsement when they deposited the funds into an account, rather than, say, cashing the check, even if the checks were forged and the account was Salous’ account. Western Assurance and Connors Consulting Group (CCG) were collaborating on a contract (Indiana state government hiring both businesses for their expertise in reference to a FICA (Social Security / payroll-related) tax recovery program) and opened separate accounts at Star, but both accounts allowed officers of the other company to endorse checks and perform other transactions. The two companies had a professional disagreement and subsequent falling out. Later Western sued Star for allowing a dishonest employee at CCG to deposit “For Deposit Only” checks payable to Western into some previously fallow/disused/abandoned CCG accounts. The Court did not find Star liable for ignoring the restrictive endorsement because, notably, Western and CCG had previously included each other’s representatives on their account signature cards (Cudahy, 1993).

The Court cited UCC 3-405(1)(c) (i.e., the “fictitious payee” or “padded payroll” rule that holds employers liable for bad employees committing fraud), and noted that § 3-405 does not protect Qatar from a thieving employee cashing unendorsed (unsigned) checks.

The Court said that a forged endorsement does not serve to transfer a check’s title (§§ 3-404, 3-202) and cited Stone & Webster (Wilkins, 1962) and Kraftsman v. United (Drier, 1979). In both cases, company employees forged checks and the banks which cashed the forgeries were said not to have acted in good faith.

Citing § 8.4-401, and Prudential-Bache v. Citibank (Kaye, 1989), the Court said that the drawee bank (First American, with whom Qatar, as drawer in this situation, had an account) is not entitled to deduct funds from the drawer’s account to satisfy a fraudulent check (Ellis, 1995). In Prudential-Bache v. Citibank, dishonest Citibank employees colluded with a thieving Prudential-Bache employee and his accomplice (who opened the Citibank accounts), did not file required federal legal documents for transactions over $10,000.00, and, notably, other bank employees uninvolved in the scam had also ignored the high percentage of “niners” (checks made out for $9,999.99 specifically to circumvent the federal reporting guidelines) that the thieves deposited (and then withdrew once these stolen Prudential-Bache funds were transferred to their Citibank accounts). The Court noted that Prudential-Bache v. Citibank set a precedent whereby Qatar could possibly defeat First American’s defense (that an employee forging checks was solely Qatar’s problem) if Qatar could demonstrate that First American failed to follow established standards or failed to behave with reasonable responsibility (UCC §§ 3-406, 4-406).

The Court stated that the forged signature did not prevent the bank cashing the check per UCC § 3-405, but the accompanying “For Deposit Only” restriction should have forced the bank to “deposit the funds only into the account of the last endorser” (e.g., the payee’s account) as required by UCC § 3-205(c): “First American’s argument to the contrary is a little like saying that a store sign reading “shirts and shoes required” does not restrict a trouserless man from entering the store” (Ellis, 1995). Thus, Qatar could insist that not just “any account” should qualify when a (forged) check is restricted by “For Deposit Only.”

The Court held that First American et al failed to obey the restrictive endorsements on the “For Deposit Only” checks that they deposited into Salous’ personal accounts. Whereas Qatar is stuck taking the loss for checks Salous forged without the restrictive endorsements because a bank can’t be charged with conversion for processing unendorsed checks, even if they are forged (per § 3-405), First American et al were liable for conversion, as Qatar asserted, for the total face value of the “For Deposit Only” checks that were deposited into Salous’ accounts rather than Qatar’s (because depositary banks must comply with restrictive endorsements (UCC § 3-206).

The Court also said that if the depository bank asked Salous to write an account number on the forged checks, then the “for deposit only” endorsement would be violated, because the original assumption would have any deposit go into the payee’s account. If Salous took it upon himself to put his own account number on the check prior to handing it over to a bank representative, then the depositary bank would not be liable for conversion as Qatar asserts, because they can argue that they acted with reasonable care and complied with the restrictive endorsement as written on the check when it was presented (Ellis, 1995).

So we have our answers:

1)      Is a bank liable to a customer who endorses a check “for deposit only into account [number]” if the check is deposited into the wrong account? According to Qatar v. First American Bank of Virginia, 1995 (affirmed by an appellate court’s decision), yes, because “for deposit only” is a restrictive endorsement that requires the bank to perform a specific action.

2)       Is a bank liable if a customer’s endorsement simply says “for deposit only”? Since “for deposit only” implies that the check is to be deposited into the payee’s account per UCC § 3-206(3), then it does matter if the bank instead deposits the funds into a third party’s account. In this case, a fictional payee (or a real client to whom no payment was owed) named on the “pay to” line plus a forged payee signature do not override the basic assumption of a restrictive endorsement like “for deposit only.” As the court pointed out, it is unreasonable to assume that an account holder would want a “for deposit only” check deposited anywhere but in its own account.

3)      Would any account qualify to satisfy the endorsement? As noted above, no. The bank would not be liable if the funds went to the account holder rather than being stolen (by an employee with forged checks) from the account holder.Otherwise, they might be, if the account holder can convince a court that the bank did not follow best practices and guidelines when examining checks. The court did note that it matters when and at whose behest an account number is added to a “for deposit only” endorsement. First American will be liable only if Salous added his account number after being directed to do so by a bank representative. (If he wrote his account number down on his own without being asked to do so by a bank employee, then they are not liable.)

4)      Would any bank qualify? If a drawee bank fails to observe reasonable standards of care and due diligence, it can be liable; generally it is the depositary bank which actually accepts a forged check, but it is the drawee bank which releases the drawer’s (account holder’s) funds. This doesn’t seem fair, as part of the UCC holds employers responsible for employee theft via check forgery or fraud because the employer is supposedly in a better position to examine and curb (if necessary) the employee’s behavior directly but the depositary bank–which actually handles and allegedly examines checks–is not held to a similar standard, even though it would arguably have a better chance to examine a check for forgery or irregularities. This is an odd guideline, since the drawee bank is the one releasing funds and therefore on the hook, but such are the rules.

In short, the only checks that First American will have to refund to Qatar are those with “For Deposit Only” endorsements which First American deposited into any account other than Qatar’s, including any “For Deposit Only” checks that a bank representative may have asked Salous to endorse with an account number (even if he wrote his own account number). If Salous placed his own account number on those checks in advance, then the banks are off the hook for any of Qatar’s embezzled funds represented by those particular checks.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

USLegal. (2012). Fraudulent Conversion Law & Legal Definition. Retrieved from http://definitions.uslegal.com/f/fraudulent-conversion/

USLegal. (2012). Civil Causes of Action – Conversion Law & Legal Definition. Retrieved from http://definitions.uslegal.com/c/civil-causes-of-action-conversion/

Cudahy, Circuit Judge (United States Court of Appeals, Seventh Circuit). (1993). Western Assurance Co. v. Star Financial Bank of Indianapolis, 3 F.3d 1129 (7th Cir.1993). Retrieved from http://openjurist.org/3/f3d/1129/western-assurance-co-inc-v-star-financial-bank-of-indianapolis

Wilkins, Circuit Judge (Supreme Judicial Court of Massachusetts, Suffolk). (1962). Stone & Webster Eng’g Corp. v. First Natl. Bank & Trust, 184 NE 2d 358. Retrieved from http://scholar.google.com/scholar_case?case=7544253803203684392&q=Stone+%26+Webster+Eng%27g+Corp.+v.+First+Nat%27l+Bank+%26+Trust+Co&hl=en&as_sdt=2,11&as_vis=1

Drier, Supreme Court Justice (Superior Court of New Jersey, Law Division). (1979). Kraftsman Container Corp. v. United Counties Trust Co., 169 N.J.Super. 488, 404 A.2d 1288, 1291 (Law Div. 1979). Retrieved from http://www.leagle.com/xmlResult.aspx?xmldoc=1979657169NJSuper488_1600.xml&docbase=CSLWAR1-1950-1985

Kaye, Judge (Court of Appeals of the State of New York). (1989). Prudential-Bache v. Citibank, 73 NY 2d 263 – NY: Court of Appeals 1989. Retrieved from http://scholar.google.com/scholar_case?case=4563867008960507921&q=Prudential-Bache+Sec.,+Inc.+v.+Citibank&hl=en&as_sdt=2,11&as_vis=1

Mann, R. A. & Roberts, B. S. (2010). Essentials of Business Law and the Legal Environment. Retrieved from http://books.google.com/books?id=sFFR3y510R0C&pg=PA437&lpg=PA437&dq=Qatar+v.+First+American+Bank+of+Virginia,+1995&source=bl&ots=If8PqNYmnx&sig=s7363hHs53IjES6TR5PC-aBDWqA&hl=en&sa=X&ei=Y6CAUL6uF4zXsgadyoHYAg&ved=0CEkQ6AEwBA#v=onepage&q=Qatar%20v.%20First%20American%20Bank%20of%20Virginia%2C%201995&f=false

Ellis, District Judge (United States District Court, E.D. Virginia, Alexandria Division). (1995, April 4). State of Qatar v. First American Bank of Virginia, 880 F. Supp. 463 – Dist. Court, ED Virginia 1995(MEMO) [a.k.a. “Qatar I”]. Retrieved from http://scholar.google.com/scholar_case?case=2348881501872498088&q=Qatar+v.+First+American+Bank+of+Virginia,+1995&hl=en&as_sdt=2,11&as_vis=1#[8]

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, ALEXANDRIA DIVISION. (1995, May 3). STATE OF QATAR v. FIRST AMERICAN BANK OF VIRGINIA. Retrieved from http://va.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19950503_0000056.EVA.htm/qx

Ellis, District Judge (United States District Court, E.D. Virginia, Alexandria Division). (1995, May 3). The STATE OF QATAR, et al., Plaintiffs, v. FIRST AMERICAN BANK OF VIRGINIA, d/b/a First Union National Bank of Virginia, et al., Defendants. (MEMO). Retrieved from http://scholar.google.com/scholar_case?case=1102569369018879687&q=Qatar+v.+First+American+Bank+of+Virginia,+1995&hl=en&as_sdt=2,11&as_vis=1

 

(Paralegal) Goods Lost In Transit: Who Is Responsible?

Goods Lost In Transit: Who Is Responsible?

In our case study, Good Buy Electronics has ordered 1,000 Blueberry cell phones. Foolishly, the contract between Good Buy and Blueberry Manufacturing Company fails to specify who will bear the risk of loss or the shipping terms. A common carrier is instructed to deliver the phones to Good Buy, but the goods are lost in transit. Who should bear the loss: Good Buy or Blueberry?

In a previous case study, Big Buy (presumed to be a pseudonym for Best Buy) sold an individual named Brian a refrigerator. The refrigerator was damaged en route before Brian could examine it and determine whether to accept or reject it as conforming to the standards Big Buy promised. The “real world” retailer, Best Buy, apparently has a destination contract with individuals and with businesses (like Cornell University) — it is not difficult to find examples of Best Buy’s terms online — and it is clearly assumed that the individuals and businesses will end up personally using the items sold to them (Benson, 2012). Thus we assumed that Big Buy might also have had a destination contract which, if true, would let Brian off the hook and not force him to pay for a non-functional appliance.

It matters when the title (or ownership) of the goods transfers from seller to buyer. UCC § 2-401(2) clarifies that the buyer takes ownership, or the title, once the seller successfully physically delivers the goods and the buyer deems them to be acceptable and as advertised. Brian would be within his rights (per UCC § 2-601 and 2A-509) to refuse to accept delivery of a damaged refrigerator, and thus its title would not be passed to him because the seller, Big Buy, did not place conforming goods into his care (UCC § 2-503). Traditionally conflicts over loss were covered by two vendors’ insurance carriers, but in our earlier case study, Brian, as a non-merchant, is unlikely to have insured a refrigerator he does not yet possess, and, in fact, the UCC has had to adjust its guidelines to cover cases where Internet-based merchants sell directly to consumers online because individuals (unlike fellow vendors) probably won’t be insured. The UCC now takes into account which party can be considered to have control over the goods, and the likelihood that one is more likely to have insurance than the other (Gardenswartz, 2001).

Here, however, we have one vendor selling items to another vendor, both of which can be assumed to have insurance in place to protect themselves from losses, but we are told that no contract (destination or otherwise) has been agreed upon. We thus have to establish which party was considered to be in control of the phones when they were lost. Even if we are to assume Good Buy is another pseudonym for Best Buy, the situation can not be assumed to fall under the same destination contract guidelines that Best Buy has for individual buyers who intend to make personal use of a purchased item (or to provide supplies for the person use of employees, as Cornell does).

There is also a difference between an item that is damaged, as Brian’s refrigerator was, and an entire shipment of Blueberry phones which have simply vanished into the ether and are presumed lost in transit. In one case, a physical object, albeit non-functional, can be examined and evaluated. In this case, the phones are misplaced, so no one can judge whether they conform to Good Buy’s standards and Blueberry’s advertising or not.

Normally UCC § 2-509 and § 2-510 dictate – if there is not a delivery contract specifying otherwise (see: UCC § 2-401, § 2-503) – that any risk for damaged goods is assumed by the buyer  (as long as the goods were damaged in transit and not knowingly sold in a damaged state by the seller, which would be a breach of contract), because a buyer has the benefit of proximity to the items in question once they arrive at the buyer’s destination and s/he can examine them for conformity or damages more easily (Grewal, 1991). Per UCC § 2-509(1)(a), we would assume that Good Buy and Blueberry have a shipment contract by default, because no contract exists and when a contract is not specified, the presumption is that a shipment contract exists (Barnes, 2009). Good Buy and Blueberry failed to establish protocol that would clarify “risk of loss” guidelines (clarifying which party is required to pay if something goes wrong that is not the fault of either party). Establishing who is on the hook for a loss when selling or buying goods is vital because theft or loss of items (after the seller relinquishes possession of those goods to a carrier tasked with delivering the goods to a buyer) is not an unexpected or unprecedented possibility.

If Good Buy and Blueberry decide after the fact when, exactly, the title to the phones transferred from Blueberry to Good Buy, and thus which party should take the loss (assume it to be unlikely that either party is going to want to assume that financial burden), that simplifies the problem. As Good Buy and Blueberry (or their insurance companies) are both likely to contest who should suffer the loss, the UCC guidelines (§ 2-509) clarify that the title transfers to the buyer once the seller has reasonably fulfilled his or her obligations at his or her end of the sales contract. If there is no breach on the part of the seller, the risk of loss will then shift to the buyer once the goods are delivered; but if there has been a breach of contract (such as non-conforming goods), then UCC requires the breaching party (here, the seller) to bear responsibility (New Charter University, 2012), (Twomey, 2011). In short, UCC § 2-509(2) normally places the responsibility of loss in the hands of whichever party has legal ownership of the disputed goods at the time they were lost, but basic UCC guidelines clarify that risk of loss is not tied strictly to title ownership of goods. If two parties have a shipment contract (for example, the seller designating goods as “free on board” or F.O.B), risk of loss passes to the buyer once the seller has placed the goods into the care of a carrier. If two parties have a destination contract, risk of loss only passes to the buyer once goods have arrived at their intended destination (Klett, n.d.).

In John W. Jordan, II, v. Kentshire Galleries, Ltd., et al., Jordan appealed an earlier decision in favor of Kentshire Galleries. Jordan alleges that he purchased an antique from Kentshire and that it arrived damaged. This was a case where there was no clear contract drawn up and no language on any of the sales documents designating whether it was a shipping or destination contract; the latter would clearly hold Kentshire solely liable for the damaged furniture item. Initially the court had decided that Jordan and Kentshire had a shipping (shipment) contract, rather than a destination contract, and thus Kentshire was not responsible for the loss once the carrier picked up the antique furniture item. (The appellate court revised its opinion when Jordan clarified that the seller made him pay for insurance to cover the safe transport of the antique, that they recommended the art packer / carrier company that apparently caused the damage, and that the antique was not the age represented by Kentshire and also had inherent defects which made it susceptible to cracking and becoming damaged.) Had the antique been stolen or lost in transit, the court might still find for Jordan because the seller, Kentshire, required him to pay insurance to cover the shipping for the antique and urged him to select a specific art packer (which wound up damaging the antique). Jordan could be excused for reasonably believing that he would receive in good condition the item he bought from Kentshire. That the antique was also a “one of a kind” item may also have influenced the decision; Jordan could not exercise his right as a buyer to demand a replacement for a non-conforming item because there would likely be no comparable item available.

In Dana Debs v. Lady Rose Stores, Ltd., Dana Debs was a clothing manufacturer located in Long Island and Lady Rose was a vendor in New York City. Stuart Express Co. picked up 288 garments from Dana Debs, the seller, to deliver to Lady Rose Stores and eleven other vendor buyers. Stuart informed Debs that the entire shipment was lost, and its liability was limited to a dollar per item. Debs issued a bill for the retail cost for the lost garments to Lady Rose Stores, which disputed it and declined to pay. Both parties cited UCC 2-509, Dana Debs contending that the title for the garments passed to Lady Rose Stores once the carrier, Stuart, took possession of them. Lady Rose Stores contended that they had a destination contract, but the court disagreed, because Lady Rose Stores had designated Stuart to pick up the shipment and because Dana Debs had marked the bill of sale “Terms, FOB, NYC”. The court held that Lady Rose Stores, as buyer, assumed the risk of loss once Stuart picked up the goods, and held that they had to pay Dana Debs the requested amount in full.

Conversely, in Mark La Casse v. Stan Blaustein et al., the court found in favor of the buyer. La Casse was a student at the Massachusetts Institute of Technology (MIT) who helped defray tuition expenses by operating as a small-scale vendor, selling calculators to other students. He purchased 23 calculators for $2,744.00 from Stan Blaustein in New York City. As United Parcel Service was on strike, a Blaustein employee, Flor Perez, chose to use the United States Post Office as carrier and to pack the calculators into two separate boxes. La Casse sent Blaustein a $50.00 check to cover postage and insurance. Perez chose not to insure the packages for their full replacement value, which would have cost $16.26, and which would have been covered by the check La Casse sent Blaustein, and instead insured them for $200.00 total each, which cost $9.98. Perez also mistakenly sent one of the cartons to the wrong state. It was lost, and its replacement value was $1,663.00. La Casse did not receive a refund of the purchase price of the calculators nor the insurance payment for $200.00. Though the court found that La Casse’s instructions to use the USPS was insufficient to convert the sales contract into a destination contract as opposed to a shipping contract, and thus that he should be liable for the loss, the extenuating circumstances (Blaustein should not have insured the goods for less than their full replacement value, especially when La Casse had given Blaustein enough money to pay for full coverage, because normally the risk of shipment is placed on the purchaser and La Casse acted in good faith to mitigate that risk; as with Jordan v. Kentshire, the seller took it upon itself to interfere with the buyer’s insurance purchasing and carrier choice decisions) led the court to decide in favor of La Casse and Blaustein was ordered to refund La Casse’s money, plus interest, for the lost goods.

In our Good Buy / Blueberry case study, where there was no clarification in the sales contract determining who would bear the cost of potentially lost or damaged goods, no mitigating circumstances mentioned, and no defined shipping terms, Good Buy must bear the loss. The default contract, where none has been specified, is a shipping contract, and thus once Blueberry handed over the phones to a carrier, Good Buy was on the hook if something should go wrong, as it did.

 

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Benson, D. (Cornell University Contract Administrator). (2012). Best Buy. Retrieved from http://www.dfa.cornell.edu/supply/supplierlist/electronics/bestbuy.cfm

Barnes Jr, L. K. (2009, October). Determining Which Party Bears Risk of Loss for Shipments Governed by the Uniform Commercial Code. Retrieved from http://barnespc.com/news-risk-loss-shipments-governed-ucc.php

Abbott, B. (2012). What Does FOB in Shipping Mean? Retrieved from http://www.ehow.com/facts_7672155_fob-shipping-mean.html

Grewal, S.S. (1991, November 1). Risk of Loss in Goods Sold during Transit: A Comparative Study of the U.N. Convention on Contracts for the International Sale of Goods, the U.C.C., and the British Sale of Goods Act (Originally published in 14 Loy. L.A. Int’l & Comp. L. Rev. 93 (1991). Retrieved from http://digitalcommons.lmu.edu/cgi/viewcontent.cgi?article=1239&context=ilr

The American Law Institute and the National Conference of Commissioners on Uniform State Laws. (2003, January 23). Uniform Commercial Code (Hosted by: Cornell University Law School, Legal Information Institute). Retrieved from http://www.law.cornell.edu/ucc/ucc.table.html

New Charter University. (2012). Business Law and the Legal Environment, Chapter 18: Title and Risk of Loss. Retrieved from https://new.edu/resources/title-and-risk-of-loss

Supreme Court, Appellate Division, First Department, New York. (2001, April 17). John W. Jordan, II, v. Kentshire Galleries, Ltd., et al. Retrieved from http://caselaw.findlaw.com/ny-supreme-court-appellate-division/1202875.html

Gardenswartz, S. (2001). The Risk of Loss in Electronic Transactions: Vintage Law for 21st Century Consumers. Retrieved from http://www.vjolt.net/vol6/issue3/v6i3-a15-Gardenswartz.html

Boyd-White, H. S. (2010, June 29). Chapter 16: Title and Risk of Loss. Retrieved from http://www.scribd.com/doc/33716055/Ch16-SG-BLTS-8e

U.S. Supreme Court. (1964, May 4). Missouri P. R. Co. v. Elmore & Stahl, 377 U.S. 134 (1964) 377 U.S. 134. Retrieved from http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?navby=case&court=us&vol=377&invol=134&pageno=137

U.S. 2nd Circuit Court of Appeals. (1999, April). Windows, Inc. v. Consolidated Freight. Retrieved from http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=search&case=/data2/circs/2nd/987603.html

Klett, T. (Assistant Professor at Sam Houston State University). (n.d.). TITLE, RISK AND INSURABLE INTEREST: IDENTIFICATION OF GOODS. Retrieved from http://www.shsu.edu/~klett/CHAPTER%2020%20gba362.htm

Colvin, E. (Adjunct Instructor at Campbellsville University). (2010, June). Sales & Lease Contracts: Performance, Warranties, & Remedies – Chapter 14. Retrieved from http://ecolvin.pageout.net/page.dyn/student/course/instructor_note?note_id=11474857&course_id=159878

Civil Court of the City of New York, Special term, New York County. (1970, June 24). Dana Debs v. Lady Rose Stores. Retrieved from http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19700624_0042496.NY.htm/qx

Civil Court of the City of New York, New York County. (1978, March 20). Mark La Casse v. Stan Blaustein et al. Retrieved from http://ny.findacase.com/research/wfrmDocViewer.aspx/xq/fac.19780320_0041289.NY.htm/qx

 

(Paralegal) Goods Damaged En Route: Who Is Responsible?

 

 

 

 

 

 

 Goods Damaged En Route: Who Is Responsible?

In our case study, Brian purchases a refrigerator from a retailer, Big Buy, which agrees to deliver it to Brian’s house. Before the truck is able to deliver, it is involved in a traffic accident and all contents, including Brian’s refrigerator, are destroyed. Who should bear the loss, Big Buy or Brian?

There are a number of legal guidelines that cover circumstances like these, albeit not very clearly. Although we cite the Uniform Commercial Code (UCC), it is interesting to note that Article 68 of the U.N. Convention addresses the issue of who bears the risk of loss of goods during transit in a simple point-to-point sale. The introduction of the widespread use of shipping containers and the “daisy chain” of shippers and handlers between seller and buyer introduce complications the Convention did not offer any firm guidance about, however, leaving it a grey area. The general rule is that the buyer bears the transit risk, because the seller will be at a distance from the damaged goods and the buyer will be in a better position to access the damage and issue a claim against the shipper (Grewal, 1991).

The UCC’s provisions are more detailed than the Convention’s when dealing with loss of goods during transit: § 2-510 states “Where […] delivery of goods so fails to conform to contract as to give a right of rejection, the risk of loss remains of the seller until cure or acceptance.” UCC § 2-509 and § 2-510 focus less on “property” concerns (who owns what when) and more on sales contracts themselves; it still presumes that the risk falls onto the buyer — when there has not been a breach by the seller (such as knowing selling damaged items) — due to the buyer’s proximity to the damaged goods, unless the sales contract between buyer and seller specifically designate the seller as responsible for damages occurred in transit. UCC § 2-501(1) asserts that the buyer acquires an “insurable interest” in the purchased goods even if the goods are non-conforming and the buyer intends to reject them on those grounds (Grewal, 1991). There are exceptions, however, and Brian’s case applies.

UCC § 2-613 states that when goods suffer damage between point A and point B, and the buyer has not yet been able to identify the state of those goods when the damage occurs, the buyer can insist on inspecting those goods and choose to consider the contract voided if the goods are non-complaint with reasonable standards, or work with the seller to settle upon an acceptable remedy, which may include a discount of the previously-agreed-upon cost to the buyer to cover the buyer’s presumed repair costs (if applicable) “but without further right against the seller,” meaning that the buyer can’t drag the seller into court and demand punitive damages for damaged goods, she or he can only ask for a refund (voiding the contract due to non-complaint goods) or an equitable replacement.

The problem is determining when the damage occurred (or dealing with hidden damage that the buyer could not be aware of immediately). Unlike under the Convention, which generally requires buyers to bear any loss, the UCC allows buyers to reject goods that do not pass muster. Sales contracts should include clear language that addresses the problem of damage in transit and clarifies which party bears the brunt of responsibility for those goods.

The method of delivery determines, to a great degree, when ownership of goods occurs. A shipment contract requires the seller to relinquish the goods to a middle-man carrier or shipper, and the ownership of those goods falls on the buyer at the point where they are shipped. In a delivery contract, the seller is responsible for the goods until they reach the buyer (or a third party designated by the buyer). In the latter case, the condition of those goods is the responsibility of the seller until the buyer or the buyer’s representative actually takes possession of what are assumed to be conforming goods (UCC § 2-401, § 2-503).

For our purposes, Brian and Big Buy have a destination contract, and probably a “sale or return” contract as well, as most big box retailers allow a buyer to return purchased items within a limited time period, but we don’t know that as fact from the details given. The right to identify (or inspect) purchased goods protects the buyer, as risk of loss cannot pass to the buyer until the buyer acknowledges receipt of conforming goods (§ 2-105(2) specifies that title can’t pass to buyer until buyer examines goods and accepts them, § 2-505(1) specifies when identification takes place).

UCC § 2-509(1)(a) assumes that buyer and seller have a shipment contract when it states that risk of loss mid-transit or shipment falls on the buyer, as long as the seller makes a good-faith and reasonable arrangement with a carrier that takes the nature of the goods into account (in other words, perishables would have to be placed in a refrigerated container, fragile breakables would have to be handled with due care to avoid damage), as long as the seller promptly provides the buyer with any documentation required to take possession of the goods, and as long as the seller promptly informs the buyer when goods are to be shipped (Oberman, 1997).

When type of contract is not specified or it is ambiguous, a shipment contract is assumed (Barnes, 2009, citing Windows, Inc. v. Jordan Panel Systems Corp., 177 F.3d 114 (2nd Cir. 1999)), and the buyer bears the brunt if goods in transit are damaged, but, according to Cornell University, Best Buy (we’ll assume Big Buy is a pseudonym) uses destination contracts (“all shipments are FOB (“free on board” or “freight on board” (UCC § 2-319)) destination, with freight pre-paid and added to the invoice”), so we can presume that our case study also refers to a situation covered by a destination contract (Benson, 2012).

If the contract is (as we are inferring) a destination contract, Big Buy needs to honor Brian’s purchase and replace the damaged refrigerator. Brian did not have the opportunity to examine the refrigerator and to accept or reject it as non-conforming (and a damaged appliance – whether fully destroyed or partially damaged — would certainly qualify). Big Buy’s responsibility does not lapse until Brian receives the item he purchased, whether or not a middle-man (or third-party bailee (Twomey, 2011) acting as carrier) fails to deliver the goods, and whether or not the bailee is at fault for that (such as when the bailee’s delivery truck is totaled in a traffic accident).

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Benson, D. (Cornell University Contract Administrator). (2012). Best Buy. Retrieved from http://www.dfa.cornell.edu/supply/supplierlist/electronics/bestbuy.cfm

Barnes Jr, L. K. (2009, October). Determining Which Party Bears Risk of Loss for Shipments Governed by the Uniform Commercial Code. Retrieved from http://barnespc.com/news-risk-loss-shipments-governed-ucc.php

Honnold, J. O. (Pace Law School Institute of International Commercial Law). (2004, December 15). Risk of Loss (Originally published in Published in Galston & Smit ed., International Sales: The United Nations Convention on Contracts for the International Sale of Goods, Matthew Bender (1984), Ch. 8, pages 8-1 to 8-15). Retrieved from http://www.cisg.law.pace.edu/cisg/biblio/honnold5.html

Oberman, N. G. (1997, June). Transfer of risk from seller to buyer in international commercial contracts: A comparative analysis of risk allocation under the CISG, UCC and Incoterms. Retrieved from http://www.cisg.law.pace.edu/cisg/thesis/Oberman.html

Pellissippi State Community College. (n.d.). Title, Risk, & Insurable Interest (Originally published in Clarkson, Miller, Jetz, & Cross, West’s Business Law, 7th Edition, 1998). Retrieved from http://www.pstcc.edu/departments/lat/classes/2300/notes/chap19.htm

Grewal, S.S. (1991, November 1). Risk of Loss in Goods Sold during Transit: A Comparative Study of the U.N. Convention on Contracts for the International Sale of Goods, the U.C.C., and the British Sale of Goods Act (Originally published in 14 Loy. L.A. Int’l & Comp. L. Rev. 93 (1991). Retrieved from http://digitalcommons.lmu.edu/cgi/viewcontent.cgi?article=1239&context=ilr

The American Law Institute and the National Conference of Commissioners on Uniform State Laws. (2003, January 23). Uniform Commercial Code (Hosted by: Cornell University Law School, Legal Information Institute). Retrieved from http://www.law.cornell.edu/ucc/ucc.table.html

 

 

(Paralegal) Selecting a Business Organization Format

Selecting a Business Organization Format

In our case study, Jackson, Maria and Jessica all hope their new business (to be referred to as JMJ for convenience) will be profitable, but what if it loses money rather than generating a profit? JMJ will need to be set up to protect their personal assets. They will also have to decide how they wish to handle taxes. If they wish to have a corporation-like tax system, LLCs are state-level designations (for tax purposes), but they can choose whether to be taxed like a partnership (i.e., an unincorporated business) or a corporation at the federal level instead. Since you set up your business in the state you conduct most of your business activities (or, if nation-wide, where your headquarters are located physically), it may depend on which state you live in when deciding how to set up taxation guidelines for your LLC. Some states have noticeably “business-friendly” taxation laws (like Delaware and Nevada (Perez, 2009)) and nation-wide businesses can choose to incorporate there as well as in their home state. If Jackson, Maria and Jessica think they will prefer to handle taxes as “pass-through entities” (Andrade, n.d.), then a LLC set up to be taxed at a shareholder or member level (an LLC-partnership), a LP, or a LLP might be a wiser choice.

If a business is profitable, it should consider choosing the LLC-corporation format, where taxes are paid federally. If a business is just starting out or might lose money before turning a profit, then choosing a system which distributes profit (or loss) among shareholders or members may be wiser, in which case LLC-partnerships, LPs, or LLPs should be considered, as members pay their share of taxes individually while being protected from any personal asset forfeiture or legal problems if the business as an entity experiences difficulties (and limited partners–who contribute financially but not in any business decision-making processes–won’t be forced to pay a self-employment tax, which can be expensive). When the business becomes reliably profitable and shareholders or members start to risk being bumped up into a higher tax bracket, it is acceptable to change your form of business, and selecting (as an example) a LLC-corporation at this point can shield individuals from higher tax payments.

JMJ also will have to decide how they intend to conduct business. Jackson and Maria clearly intend to take more active roles in shaping and promoting JMJ, whereas Jessica wishes to finance the venture but does not feel like her skills will benefit JMJ. Jackson and Maria will prefer to operate as general partners (if JMJ were a realty, Maria could not be both a salesperson (a real estate broker) and a general partner (Joint Committee on Administrative Rules, n.d.), but JMJ is not selling real estate), while Jessica may feel more comfortable (and more protected from personal liability) as a limited partner who contributes funding but does not take an active part in managing or making decisions for the business.

LLPs are typically restricted to legal partnerships between people offering specific services that also typically require the practitioner to be licensed. LLP registrations must be renewed annually (Tufts, 1998). Architects, physicians, dentists, lawyers, and other similar professionals may choose to partner with other professionals in their field, usually while sharing office space and a physical business address. In LLPs, each partner has some personal liability protection, so if, for example, several psychiatrists have formed an LLP and share office space and one is sued, the other psychiatrists in the LLP are not considered legally responsible (unless one was in a supervisory position over the one which was sued; but they may be held financially responsible as partners if the business can’t repay its debts or they may have to contribute to the cost of a sued partner’s lawsuit). Profits from LLPs are also taxed individually (treated like personal income), and not like corporations. Some states do not recognize LLPs, and LLPs are dissolved if one partner dies, retires or leaves, which requires debts and assets to be distributed (if there is not a prior business agreement in place that would allow the other partners to buy the departing partner out) and then the remaining partners have to form a new LLP or consider a different business organization. Since JMJ will not be formed by a group of people with licenses to perform the same professional services, we aren’t told whether their state recognizes LLPs, and since Jackson, Maria and Jessica are not going to be involved in exactly similar ways in the business, a LLP probably does not suit their purpose (Brown, 2012).

LPs are partnerships which require at least one general partner and at least one limited partner, are “typically used for asset protection purposes or for family estate planning and gifting purposes (to avoid estate taxes),” and may require setting up a “shell company” to act as a general partner to protect assets and avoid some taxation (Twomey, 2011). LPs require at least one general manager to handle the business, and this person or people bear the brunt of any liability or business-related debts. JMJ technically qualifies, as it would have two general partners – Jackson and Maria — managing the business’ professional decisions and its activities, and one – Jessica — choosing to limit her contributions to investing capital into the business. Jessica’s personal risk would therefore be limited to possibly losing some or all of her invested funds, but she would be protected from incurring any of JMJ’s business-related debts or dealing with any potential legal problems with which JMJ (as a business entity) might become involved (unless Jessica herself performs a negligent act ostensibly on behalf of JMJ).

LLCs have to include “LLC” in the business’ legal name and clarify in their Articles of Organization (similar to a corporation’s Bylaws, and these legal documents are required to be properly filed with the correct department, usually the Secretary of State: an oral agreement alone is not legally sufficient to form a LLC, even though an oral agreement is considered sufficient for setting up the LLC’s management structure or its operating agreement (Twomey, 2012)) whether its business will be handled by managers or members. Managers (like general partners) act like a Board of Directors, but members (like limited partners) act like shareholders or investors. Some states have restrictions on which occupations are allowed to form LLC businesses (Murillo, 2012); JMJ would be operating like a typical for-profit start-up, however, and shouldn’t run into an occupational-restriction barrier to forming a LLC. People who form LLCs typically are not held personally liable for the LLC’s debts or legal issues as long as they were up front about their relationship to the LLC and acted in good faith: no one is liable beyond their investments or equity in an LLC, and everyone’s personal property and other assets are protected. Members of LLCs, like Jessica, can defer to managers, like Jackson and Maria, to act as authorities on behalf of JMJ (Twomey, 2012).

Jackson, Maria and Jessica should probably consider forming a LLC-partnership, with the option to shift into a LLC-corporation for tax purposes once JMJ turns profits regularly. Jessica can protect herself while still contributing money from her inheritance, and Jackson and Maria can take more active roles in the company as general partners.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Perez, W. (2009, June 12). Protect Your Business Profits by Incorporating: Choosing the Best Form of Business for Your Needs. Retrieved from http://taxes.about.com/od/taxplanning/a/incorporating.htm

Murillo, V (The Houston Chronicle). (2012). Business Models & Organizational Structure. Retrieved from http://smallbusiness.chron.com/limited-liability-partnerships/

Andrade, H (Texas Secretary of State). (n.d.). Selecting a Business Structure. Retrieved from http://www.sos.state.tx.us/corp/businessstructure.shtml

Brown, K (Oregon Secretary of State). (2012). Select Your Business Name and Structure. Retrieved from http://filinginoregon.com/pages/business_registry/info_center/bus_resources/steps_starting/busname_structure.html

Tufts, R. A. (1998). Choosing a Business Structure to Limit Liability (Originally published in Highlights Of Agricultural Research, Volume 45 Number 1, Spring 1998). Retrieved from http://www.aaes.auburn.edu/comm/pubs/highlightsonline/spring98/liability.html

Secretary of State Information / South Carolina Is Open For Business. (2011, February 2). Difference between a “limited partnership,” a “limited liability partnership,” and a “limited liability company?” Retrieved from http://www.scsoscom.com/?p=911

Joint Committee on Administrative Rules. (n.d.). Administrative Code (TITLE 68: PROFESSIONS AND OCCUPATIONS / CHAPTER VIII: DEPARTMENT OF FINANCIAL AND PROFESSIONAL REGULATION / SUBCHAPTER b: PROFESSIONS AND OCCUPATIONS / PART 1450 REAL ESTATE LICENSE ACT OF 2000 / SECTION 1450.600 CORPORATIONS, LIMITED LIABILITY COMPANIES, PARTNERSHIPS AND LIMITED PARTNERSHIPS). Retrieved from http://www.ilga.gov/commission/jcar/admincode/068/068014500F06000R.html

(Paralegal) Comparing a LP with a LLC

Comparing a LP with a LLC

In our case study, Sarah and Jamie have a business idea and need to decide whether a limited partnership (LP) or limited liability company (LLC) would better suit their needs and protect them and their investors (some of whom are relatives with valuable professional experience and business advice to offer). Jamie favors forming a LP, while Sarah favors a LLC.

In both LPs and LLCs, investors and owners are known as members. LPs are formed by one or more general partners (who manage the business and accept potential liability for any business debts) and one or more limited partners (who contribute funding but have limited liability, meaning that they should be shielded from any debts the business incurs or any legal problems the business gets embroiled in). With a LP, the general partners act like co-owners and can take part in management decisions but they also take on the burden of any possible business debts; limited partners risk only their investment money (i.e., none of their personal wealth or assets can be seized to repay any of the business’ debts) but are not openly presented to the general public as partners, and they do not take part in helping make company decisions. An LP can set up a shell company; this means naming a corporation / “corporate person” as the functional general partner so members of the LP can try to avoid personal liability, but this is not without risk, as a court could decide that this “person” is a legal fiction and thus cause the LP to lose its only general partner and force it to dissolve (and LLCs can have similar problems).

A limited liability company has the limited liability of a corporation, but is taxed like a partnership; all profits are funneled through the owners, meaning that the LLC doesn’t pay federal taxes on its profits but the members report the income on their personal tax returns. (To clarify, an LLC, depending on how it is set up, can have a single member and be taxed more like a sole proprietorship, or it can have multiple members and be taxed and treated like a partnership or corporation; typically, however, members file their pro-rated share of taxes rather than the LLC filing taxes for them.) An LLC can set up a “corporate person” / corporate entity, but this is not bullet-proof protection from personal liability for individual members, as was noted in the case study in our textbook of Kaycee Land and Livestock v Flahive, 46 P3d 323 (Wyo 2002), where Kaycee sought to “pierce the corporate veil” and hold an individual, Roger Flahive, as the decision-maker and managing member of his LLC, personally responsible for environmental damage done to Kaycee property: the court decided that Kaycee could indeed pursue a suit against Flahive rather than his LLC (Twomey, 2011).

Both LPs and LLCs must cite a primary physical address for the business. LPs must file a Certificate of Limited Partnership with the appropriate state office, and an expected date of dissolution of the partnership (if known; otherwise the expected date to dissolve the partnership continues to be “guesstimated” and renewed regularly). An LLC is, technically, considered a “person” which is separate from its members. LLCs must have an operating (rather than partnership) agreement and must also formally file their Articles of Organization (which includes partnership dissolution details) paperwork with the Secretary of State and “LLC” must be included in the business’ legal name (SUO class materials, n.d.; Twomey, 2011).

If the goal is to shield everyone from future liability and if the relatives will still invest without having a voice or vote in how the business operates (thus remaining limited, not general, partners), then selecting a LP is the wiser choice. They can not, however, offer services or advice as general partners without also accepting personal liability or incorporating (Twomey, 2011). If Jamie and Sarah decide that the expertise and business acumen of the investing relatives is worth bringing them in as decision-maker managers who are willing to accept some liability for the business’ debts, then a LLC is the better choice. Jamie and Sarah have to weigh the importance of protecting themselves and their members from personal liability, the amount of power their investors will want in influencing or making business decisions, how they want to handle their taxes, and perhaps even the guidelines defining and the amount of legal paperwork required to properly set up an LP or LLC (Stone, 2012).

Another option the women can explore is a third option: a LLP, or limited liability partnership (or RLLP, a registered limited partnership), which may hit a happy medium between an LP and LLC. An (R)LLP doesn’t have limited partners but its general partners are typically not personally liable for the (R)LLP’s business debts (or malpractice of another member, or negligence of another member, and so on) as long as a partner is not a supervising or managing partner (Secretary of State Information, 2011).

When they do choose—and a LLC sounds like it would better serve their purposes—they need to clarify all business titles, the “chain of command,” member obligations, potential liabilities members are accepting and so forth in the business’ operating agreement (a cautionary tale from the textbook explains what happens when inadequately-defined roles, an overlap of decision-making capabilities with contributions to the business’—or a competitor’s—profits directly or indirectly, and accusations of intellectual property conflicts cause problems; see: Katris v Carroll, 842 NE2d 221 (Ill App 2005) (Twomey, 2011) and make sure all parties are clear on what responsibilities and risks they are agreeing to accept in exchange for having more or less control over and/or input into the business’ decisions and policies.

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Stone, J. (2012). Difference Between LTD Partnership & LLC. Retrieved from http://info.legalzoom.com/difference-between-ltd-partnership-llc-4376.html

Secretary of State Information / South Carolina Is Open For Business. (2011, February 2). Difference between a “limited partnership,” a “limited liability partnership,” and a “limited liability company?” Retrieved from http://www.scsoscom.com/?p=911

(Paralegal) INTEROFFICE MEMORANDUM

 

INTEROFFICE MEMORANDUM

To:        Large Alabama Firm’s Senior Attorney’s Name

From:    Intern’s Name

Date:    MM/DD/YYYY

Re:       Our client, Dick Jefferson, and the validity of his contract with Yolanda Jackson

---

FACTS

Our client, Mr. Jefferson, owns House Doctor, Inc., a construction business. Ms. Yolanda Jackson (hereafter Jackson) and her son, Melvin (hereafter Melvin), met with Jefferson to discuss adding a room to Jackson’s house. As Jackson is elderly, Melvin handles her financial arrangements.

Jefferson reports that he saw literature from the American Schizophrenia Society in Jackson’s kitchen and prescription bottles labeled Haldol™ (“[treats] psychotic disorders, […] confusion and difficulty thinking” (PubMed, Haloperidol, May 2011)) and Abilify™ (“[treats symptoms of] schizophrenia ([including] disturbed or unusual thinking)…” (PubMed, Aripiprazole, May 2011)). Jefferson also witnessed Jackson taking a dose of Abilify™: he helped open the prescription bottle and prepared her a glass of water.

Melvin left shortly after Jefferson arrived and was not a witness to the verbal agreement between Jefferson and Jackson which included a $50,000 two-year home-maintenance package (including any house repairs) and the room addition. Jackson agreed to these terms and they set a date for Jefferson to start work the following Monday. When Jefferson arrived at the agreed-upon time, Jackson was not at home and did not return until after Jefferson had worked for nine hours on her home. At this point she told Jefferson she had found a better deal with another contractor and wished to cancel her contract with him. Jefferson has come to our firm to discover how or if he can enforce his verbal contract with Jackson.

ISSUES

1. Is the contract between House Doctor, Inc. and Jackson valid?
2. If the contract is invalid, why, and which contract formulation processes were omitted?
3. Suggest solutions to Jefferson to attempt to remedy his situation.

ANALYSIS

1. If Jefferson’s account is accurate, then the contract is valid because Jackson verbally accepted Jefferson’s offered terms, and agreed to pay Jefferson for his work (consideration). However, it is not binding under the Statue of Frauds, as this verbal contract involves work which could not be completed within one year. The Statute of Frauds is a defense and does not affect the validity of the contract – It comes into play when there is a breach and we seek a remedy.  It will then be raised to prevent enforcement.
2. This non-binding contract is also likely to be voidable, because Jackson is apparently mentally ill (Black, 2008). She has to no know and appreciate the nature and quality of her acts at the moment of contracting for it to be voidable.Jackson or her representative (like Melvin) may argue that she does not have the capacity to contract as she is schizophrenic: a contract is voidable if one party is aware the other party may be unable for some reason to behave in a competent or responsible fashion (Nolo, 2012) and (Johansen, 2012). Alabama law (specifically Section 8-1-170) also makes contracts of “an insane person” void (Onecle, 2012).
3. Jefferson failed to involve Melvin in the decision process even after being told that Melvin handled Jackson’s financial matters and after noting that Jackson was schizophrenic, which is a mental disorder that makes it difficult to differentiate between reality and fantasy […] and to feel and behave “normally” in social situations (PubMed, 2011). We would need to have a Power of Attorney of a court ordered guardianship for Melvin to matter.Jefferson also failed to draw up a written contract, relying only on an alleged verbal agreement.  Jefferson can attempt to meet again with Melvin and Jackson and present them with a written contract our firm has helped him prepare that will reflect the original home maintenance and construction agreement. Failing that, Jefferson can send the Jacksons a payment demand letter (bill) for his nine hours of labor, but may have trouble collecting if the Jacksons dispute that they had a legally binding agreement.

CONCLUSION

Jefferson did not get his agreement in writing, and Melvin–the family member responsible for making financial decisions–was not present when the agreement was reached. The agreement was not covered by the Statute of Frauds due to the two-year time period involved.It would apply if it was a two year contract – The SOF applies to any contract that cannot be performed within one year – assuming we have a contract. Jefferson also admits that he was aware that Jackson was medicated for schizophrenia. His success pursuing his complaint in court is not assured.

When the mental capacity of an allegedly mentally incompetent individual to enter into a contract is challenged, courts do not always rule in a consistent manner, especially if the individual is elderly (Nolo, 2012). We have to determine if an individual has been “adjudicated incompetent by a court and had a guardian appointed” or if [s]he can logically be determined by a layperson to be mentally ill but [s]he has not actually been legally determined incompetent. If a court has previously determined incompetence, all contracts are automatically void (Farlex, 2012) except contracts for “necessities” (Nolo, 2012). If no legal determination of competence has been made, contracts made by mentally incapacitated people still remain voidable and therefore potentially unenforceable. Voidable contracts are able to be ratified if capacity to consent is recovered (Farlex, 2012) but, for our purposes, this is irrelevant (as schizophrenia is partially managed by prescription drugs, but is an incurable, progressively severe mental illness) (PubMed, April 2011).

Some cases related to issues of alleged or asserted incompetence and contractual agreements which you may wish to review include: Whitehead v Town House Equities, Ltd., 8 A.D.3d 367 [2004]; Sepulveda v Aviles, 308 A.D.2d 1 [2003]; Inman v Inman, 97 A.D.2d 864 [1983]; Crawn v Sayah, 31 A.D.3d 367 [2006] and Buckley v Ritchie Knop, Inc. 838 NYS 2d 84, 86 [NY App Div, 2007] and In the Matter of Agnes D. Rick (Del Ch, No 6920, 1994 WL 148268) (Justia, 2012).  It takes very specific circumstances—such as a non-binding oral agreement—to break an otherwise legal contract even if it was made with a mentally incompetent person, if [s]he has not been officially declared by the court system to be incompetent (Psychiatric Zone, 2012).

RECOMMENDATION

Our client apparently acted in good faith but chose to verbally contract with a mentally compromised elder, and the agreement was for work that could not be completed within one year, thus their agreement was not binding and he does not appear to have a solid case. If an oral contract is subject to the Statute of Frauds, none of the parties are legally bound and either / any can renege without legal consequences (Wright, 2010).

We can attempt to protect Jefferson by drawing up a written contract for him, and by drawing up a demand letter requesting payment for his already completed work. If Melvin refuses to sign the contract, Jefferson will not be able to legally force Jackson to honor their verbal agreement “as is,” given the problems stated above, but he can present Melvin with a payment demand letter.

There is evidence that Ms. Jackson lacked contractual capacity (factual incapacity) to enter into contract: her age; Melvin’s temporary absence; pamphlets regarding mental health issues; medication; confusion on how to open medication; etc. A factual incapacity may exist when, because of a mental condition caused by medication, drugs, alcohol, illness or age, a person does not understand that a contract is being made or understand its general nature. However, mere mental weakness does not incapacitate a person from contracting. It is sufficient if the individual has enough mental capacity to understand, to a reasonable extent, the nature and effect of what she is doing.

An incompetent person may ordinarily avoid a contract in the same manner as a minor. Upon the removal of the disability (in the event he/she becomes competent), the formerly incompetent person can either ratify or disaffirm the contract. A mentally incompetent person or his estate is liable for the reasonable value of all necessaries furnished that individual. A current trend in the law is to treat an incompetent person’s contract as binding when its terms and the surrounding circumstances are reasonable and the person is unable to restore the other contracting party to the status quo ante.

If a court appoints a guardian for the incompetent person, a contract made by that person before the appointment may be ratified or, in some cases, disaffirmed by the guardian. If the incompetent person makes a contract after a guardian has been appointed, the contract is void and not merely voidable.

The Statute of Frauds and parol evidence rule should be addressed.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Institute of Career Development. (2008). Interoffice Memorandum Template. http://www.paralegalstudies247.com/help/help/interoffice_memordandum_template.htm

Onecle. (2012, February 19). Code of Alabama – Title 8: Commercial Law and Consumer Protection – Section 8-1-170 – Contracts of insane person void; exceptions; liability for necessaries furnished. Retrieved from http://law.onecle.com/alabama/commercial-law-and-consumer-protection/8-1-170.html

Casebriefs LLC. (2012). Alaska Democratic Party V. Rice. Retrieved from http://www.casebriefs.com/blog/law/contracts/contracts-keyed-to-knapp/the-statute-of-frauds/alaska-democratic-party-v-rice/

Black, L., JD, LLM (American Medical Association Journal of Ethics). (2008, March). Mental Capacity and Contracts. (Originally published in Virtual Mentor. March 2008, Volume 10, Number 3: 161-164.) Retrieved from http://virtualmentor.ama-assn.org/2008/03/hlaw1-0803.html

Nolo. (2012). Who Lacks the Capacity to Contract? Certain people lack the legal ability to enter into a binding contract. Retrieved from http://www.nolo.com/legal-encyclopedia/lack-capacity-to-contract-32647.html

Johansen, E. (2012). What Legal Considerations Make a Contract Enforceable? Retrieved from http://www.ehow.com/info_8009024_legal-considerations-make-contract-enforceable.html

Justia. (2012). Buckley v Ritchie Knop, Inc. Retrieved from http://law.justia.com/cases/new-york/appellate-division-second-department/2007/2007-04246.html

Farlex. (2012). Incompetency. Retrieved from http://legal-dictionary.thefreedictionary.com/incompetency

PubMed Health (U.S. National Library of Medicine). (2011, May 16). AHFS Consumer Medication Information: Haloperidol. Retrieved from http://www.ncbi.nlm.nih.gov/pubmedhealth/PMH0000604/

PubMed Health (U.S. National Library of Medicine). (2011, May 16). AHFS Consumer Medication Information: Aripiprazole. Retrieved from http://www.ncbi.nlm.nih.gov/pubmedhealth/PMH0000221/

Psychiatric Zone. (2012). Psychiatry and the Law. Retrieved from http://psy.sabryfattah.com/special-subjects/legal-issues/

USLegal. (2012). Schizophrenia Law & Legal Definition. Retrieved from http://definitions.uslegal.com/s/schizophrenia/

Wright, R. (2010). Is a Verbal Contract Valid? Retrieved from http://wright-law.net/publications/Verbal_Contracts.html

(Paralegal) Employment Contracts and the Statute of Frauds

Employment Contracts and the Statute of Frauds

In our assigned case study, Jennifer Masterson, with a new MBA in Accounting in hand, is hired by Big Firm. Ms. Masterson has to relocate to accept the job offer, so she requests reassurance from Big Firm that her employment, with a salary of $50,000 a year, will last a minimum of two years. Big Firm makes an oral agreement over the telephone that they hope to employ her even longer than two years. Ms. Masterson quickly drafts a letter summarizing their agreement and sends it to Big Firm. Ms. Masterson is then fired ten months after her hire date and sues for wrongful termination and breach of contract; Big Firm asserts that the Statute of Frauds allows them to ignore their previous verbal agreement. We are asked to determine if Ms. Masterson had a contract with Big Firm, if she has a viable suit for breach of contract, and if the Statute of Frauds applies to the contract between Ms. Masterson and Big Firm.

There appears to be a valid contract, as Big Firm offered Ms. Masterson employment and she accepted, and there was an exchange of Ms. Masterson’s skills as an accountant for an annual $50,000 salary from Big Firm. However, Ms. Masterson’s letter might not preserve her rights or help her legally persuade Big Firm to honor the oral contract they agreed upon over the phone; i.e., that Ms. Masterson, since she would have to relocate, would have a position for a minimum of two years with Big Firm. Big Firm did not sign Ms. Masterson’s letter, so they could argue that Ms. Masterson is misremembering their agreement. We are not told whether Big Firm is located in an “employment at will” state, but that would stack the deck against Ms. Masterson as well, as the majority of U.S. states have laws in place that protect employers more than employees.

In Aurigemma v. New Castle Care LLC, 2006 WL 2441978 (Del. Super. Aug. 22, 2006), Dr. Aurigemma sued the New Castle Care rehabilitation center in Delaware, his former employer, for breach of contract. Aurigemma alleged that he and the center had a verbal agreement that he would serve as Medical Director for one year. The rehab center claimed that there was no such agreement, but if there had been, it should be in writing to be valid and enforceable because the Statute of Frauds requires that any contract which extends beyond a one-year time period must be put into writing. The court agreed with New Castle Care. Dr. Aurigemma lost his case (Miller, 2006).

In LaRue v. Kalex Construction and Development, Inc ., Case No. 3D11-2368 (Fla. 3d DCA, August 22, 2012), Ms. LaRue was hired by Kalex in February of 2006 as a Vice President, but they terminated her employment in December of 2009. Ms. LaRue alleged that Kalex had made her a verbal promise that she would receive 25% ownership in Kalex after three years of employment; Kalex claims that they made no such offer. Unfortunately for Ms. LaRue, she failed to get Kalex’s promise in writing. Florida’s Third District Court of Appeal held that the oral contract Ms. LaRue alleged Kalex had made was not a promise that could be considered fully concluded within the span of a single year, and thus the Statute of Frauds would not apply. Ms. LaRue lost her case (Tuschman, 2012).

In Kant v. Columbia University, 08 Civ. 7476 (S.D.N.Y. Mar. 9, 2010), Professor Kant was employed by Columbia University to teach Economics. He alleged that Columbia had made a verbal promise to him that he would be promoted to a tenure-track full-time position if he met Columbia’s conditions (which included approval by the Economics Department’s senior faculty members and Professor Kant’s participation in weekly seminars) and that, a year after Professor Kant was hired and had accepted these terms made to him orally, a Professor Davis had echoed these same assurances to him. Professor Kant met all of Columbia’s conditions, requirements and obligations but was not then promoted to the senior-level position that he felt he had been promised. Even though Professor Kant had, in essence, two verbal contracts, each for a time period of less than a year, the court held that they needed to be considered as if they were the same contract. Unfortunately for Professor Kant, that meant that the Statute of Frauds would not apply, as the time period for the alleged verbal contract would then have extended beyond the one-year limit covered by the statute.  Professor Kant lost his case (Miller, 2010).

In Crabtree v. Elizabeth Arden Sales Corp., 305 N.Y. 48, 110 N.E.2d 551 (N.Y. 1953), Mr. Crabtree was offered a two-year contract with an escalating pay-scale, but did not have a single document with all the details of the agreement set down in one place. Ms. Arden approved Mr. Crabtree’s hiring and salary for the first six months, but declined to approve the agreed-upon pay raise for the second six months. Because Ms. Arden’s personal secretary had initially submitted a payroll change memorandum for Mr. Crabtree, and because Mr. Crabtree had several written documents that backed up his assertions that Elizabeth Arden (the company) had made the salary offers he alleged they had, the court agreed that a contract did not have to be confined to a single document to be valid. In this case, primarily because Mr. Crabtree had written documentation to back up his claims, even if it was not a single written contract document, he won his case (Contract Law Cases, 2008).

In Alaska Democratic Party v. Rice, 934 P.2d 1313 (Alaska 1997), Ms. Rice, a former executive director of the Alaska Democratic Party, alleges that she had resigned her post working on Al Gore’s Vice Presidential campaign because the Chair of the ADP, Mr. Wakefield, made a verbal agreement with her over the telephone to entice her to return and resume her executive director position for another two years. Ms. Rice agreed to accept the position. After she had resigned from Gore’s campaign staff and relocated to Alaska, she was then told she would not get the promised job.  In this case, the court sided with Ms. Rice because they felt that her resignation and relocation indicated “clear and convincing evidence” that her assertions were true; the ADP appealed, citing the Statute of Frauds, but Ms. Rice prevailed again upon appeal. Unfortunately, even though a jury awarded Ms. Rice damages (under both “promissory estoppel” and misrepresentation) in excess of the salary she would have earned from the ADP, she was only allowed to recover an amount that ensured that she would not profit from her suit to a degree that would eclipse the salary she had agreed to be paid by the ADP or what she would have earned should the promise of employment made by the ADP not have been made at all. She was allowed to recover reliance damages, but not to make a profit (Lawnix, n.d.).

In McInerney v. Charter Golf, Inc., 680 NE 2d 1347 (Illinois 1997), Mr. McInerney was working for Charter Golf when he received a better salary offer from a competitor and filed notice that he planned to quit. The owner of Charter Golf convinced Mr. McInerney to stay, promising him an even more competitive salary, plus regular commission income; both offers were promised to be good for the duration of his life time (unless he became disabled and unable to work, or unless he was caught engaging in some dishonest behavior). Mr. McInerney agreed, but failed to get this verbal contract in writing. When the relationship between Mr. McInerney and Charter Golf soured a few years later, he was fired. Mr. McInerney attempted to claim damages for what he felt was a breach of contract, but the court disagreed and held that all so-called lifetime contracts must be put in writing. Mr. McInerney lost his case (Ford & Harrison LLP, 2008).

Ms. Masterson’s verbal agreement with Big Firm was for a two-year period, which would mean it was not covered by the Statute of Frauds, which limits such agreements to one-year (or shorter) intervals. Since Big Firm did not, as far as we know from the information given in our case study, sign off on Ms. Masterson’s letter, which was the only written record of the alleged terms of her employment contract, then the only agreement she had with them was the oral agreement over the telephone. Ms. Masterson is not likely to be able to successfully challenge her termination and win damages in court; she is out of luck.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Miller, M. R. (2006, September 26). Recent Statute of Frauds Case from Delaware. Retrieved from http://lawprofessors.typepad.com/contractsprof_blog/2006/09/recent_statute_.html

Miller, M. R. (2010, March 18). Sometimes the Statute of Frauds Can Be a Real Pain in the Neck. Retrieved from http://lawprofessors.typepad.com/contractsprof_blog/2010/03/sometimes-the-statute-of-frauds-can-be-a-real-pain-in-the-neck.html

Tuschman, R. D. (2012, September 4). Statute of Frauds Bars Employment Contract Claim, Rules Florida’s Third DCA. Retrieved from http://www.akerman.com/Blogs/HRDefense/post/2012/09/04/Statute-of-Frauds-Bars-Employment-Contract-Claim-Rules-Floridas-Third-DCA.aspx

Farlex. (2012). Statute of Frauds. Retrieved from http://legal-dictionary.thefreedictionary.com/Statute+of+Frauds

Bloom, A. S. & Palmer, Jr., R.B. (2010). Employment Contracts: Three Counterintuitive Appellate Decisions (Previously published in New York Law Journal, Vol. 243, No. 122, Monday, June 28, 2010). Retrieved from http://www.paulhastings.com/assets/publications/1640.pdf

Cooper, C. G. (2007, May). The Basics of Employment Contracts. Retrieved from http://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/0705_litigation_employmentcontracts.html

Murray, J. (2012). What Kinds of Business Contracts Must Be in Writing? Retrieved from http://biztaxlaw.about.com/od/contractsandagreements/f/contractinwriting.htm

Contract Law Cases. (2008, November 12). Statute of Frauds. Retrieved from http://contract-law-cases.blogspot.com/2008/11/statute-of-frauds.html

Ford & Harrsion, LLP. (2008, March 26). Contracts for Life-time Employment Must be in Writing. Retrieved from http://corporate.findlaw.com/business-operations/contracts-for-life-time-employment-must-be-in-writing.html

Lawnix. (n.d.). Alaska Democratic Party v. Rice – Case Brief Summary. Retrieved from http://www.lawnix.com/cases/alaska-rice.html

Chang, G. M. (1998). NOTE: McInerney v. Charter Golf, Inc.: The Court Swings and Misses (Previously published in Loyola University Chicago Law Journal). Retrieved from https://litigation-essentials.lexisnexis.com/webcd/app?action=DocumentDisplay&crawlid=1&doctype=cite&docid=29+Loy.+U.+Chi.+L.J.+907&srctype=smi&srcid=3B15&key=be3d9c3e1b13990e56026ba86a20940b

Osherow, M. R. (2012). What is the Statute of Frauds In Florida? Retrieved from http://www.avvo.com/legal-guides/ugc/what-is-the-statute-of-frauds-in-florida

Indest, III, G. F. (2012). Employment Law. Retrieved from http://www.thehealthlawfirm.com/areas-of-practice/employment-law.html

Yonano, N. (2010, February 3). Statute of Frauds and Business Or Employment Contacts. Retrieved from http://www.propertyandprobatelaw.com/uncategorized/statute-of-frauds-and-business-or-employment-contracts/

Maslanka, M. P. (2010, June 8). The statute of frauds pops up in a case, not just a law school exam. Retrieved from http://texaslawyer.typepad.com/work_matters/2010/06/the-statute-of-frauds-pops-up-in-a-case-not-just-a-law-school-exam.html

United States District Court for the Southern District of Texas. (2010, March 3). WILLIAM D. SULLIVAN v. LEOR ENERGY LLC; LEOR ENERGY LP. Retrieved from http://www.ca5.uscourts.gov/opinions/pub/06/06-20867-CV0.wpd.pdf

Nolo. (2012). Employment At Will: What Does It Mean? If you are employed at will, your employer does not need good cause to fire you. http://www.nolo.com/legal-encyclopedia/employment-at-will-definition-30022.html

 

(Paralegal) The Corvette Contract

The Corvette Contract

Our assignment requires us to draft a one-page memorandum as an employee of the law firm Wie, Repree, Zent, Starz to Clarice Daughtery on behalf of Leonardo deCapo, who wishes to purchase a 1965 Corvette Stingray automobile from Ms. Daughtery. Ms. Daughtery has mailed Mr. deCapo a note on February 13, 2008 offering her vehicle for $25,995.00. Mr. deCapo has decided to accept her offer and to purchase the Stingray, and he mailed an arguably vague acceptance of her offer (scrawled on a napkin) on March 12, 2008. We are also asked to determine if the contract is legally binding and to include any mailbox rule implications.

The contract appears to be binding because it includes all the elements required: an offer (here, a Corvette Stingray automobile is offered for $25,995.00), acceptance of that offer (Mr. deCapo has, in his opinion, accepted Ms. Daughtery’s terms), and considerations (here it is the sale of a vehicle, with Ms. Daughtery to receive the purchase price and Mr. deCapo to receive the vehicle). In this situation, the mailbox rule would also be covered by Cal. Civ. Code §1583 (Smith, 2012).

The only quibble here may be the wording of Mr. deCapo’s acceptance, as he does not clearly state what, precisely, he is accepting, nor does he sign or date his acceptance. Ms. Daughtery might choose to profess ignorance about what Mr. deCapo was referring to when he wrote, simply, “Dear Clarice – I accept.” Ideally, acceptance of an offer would include the relevant details about that offer (i.e., what terms and conditions, precisely, one is accepting). This is, one assumes, why Mr. deCapo has chosen to hire a lawyer from Wie, Repree, Zent, Starz to help him stake his claim so he can purchase the Stingray from Ms. Daughtrey for the price she initially offered. Accepting an offer made while asserting an assumption of “justifiable reliance” may serve to make that offer contractually binding (Drennan v. Star Paving Co.(1958) 51 Cal.2d 409, 333 P.2d 757)” (Smith, 2012).

The memorandum (precedent-setting cases cited in memo are from Twomey, 2011):

[Wie, Repree, Zent, Starz: name, address] [right-justified date]

[Clarice Daughtery: name, address]

Dear Ms. Daughtery:

We are writing on behalf of our client, Mr. Leonardo deCapo, who wishes to formalize your prior agreement as outlined in your correspondence of February 13^th, 2008 offering a 1965 Corvette Stingray for $25,9995.00 [See Exhibit A, attached photocopy of Ms. Daughtrey’s offer note]. On March 12th, 2008, Mr. deCapo responded with a written acceptance of your offer [See Exhibit B, attached photocopy of Mr. de Capo’s acceptance note].

Mr. deCapo’s mailed note constitutes legal acceptance of your offer. The Mailbox Rule, also known as Dispatch Rule, states that an offer is considered legally accepted once that acceptance is put in writing and mailed via the United States Postal Service in a properly-addressed envelope with proper postage affixed (see Morrison v Thoelke, 155 So 2d 889 (Fla App 1963) and Adams v Lindsell, 106 Eng Rep 250 (KB 1818)) unless it has been previously clarified that agreement to the terms of a particular offer requires face to face acceptance (as in option contracts), or unless acceptance of a particular offer must be filed on or before a specified date. This does not apply to revocations of prior acceptance of an offer (as established in Morton’s of Chicago v. Crab House Inc., 746 NYS2d 317 (2002)).

As Mr. deCapo’s legal representative, we have attached a Contract for Purchase of a Car to this memo for your signature [See Exhibit C, attached]. We appreciate your prompt attention to this matter.

Respectfully yours,

[Signature and typed name of Wie, Repree, Zent, Starz representative]

[Exhibit A] Note from Clarice Daughtrey

[Exhibit B] Note from Leonardo deCapo

[Exhibit C] Contract for Purchase of a Car

Buyer: Leonardo deCapo

[His address and phone number]

Seller: Clarice Daughtery

[Her address and phone number]

Clarice Daughtery, hereafter referred to as the Seller, hereby conveys to Leonardo deCapo, hereafter referred to as the Buyer, full ownership and title to the motor vehicle described below:

1965 [color] Corvette Stingray, [VIN #], [odometer miles], [license plate information, if applicable]

The Buyer hereby agrees to pay $25,995.00 and all title transfer fees on March 12, 2008 [or a reasonable date that his lawyers advise him to select, when he will pay Ms. Daughtery] to the Buyer upon receipt of the motor vehicle. The Buyer also agrees to pay all title transfer fees per Seller’s request.

This vehicle is acknowledged by both parties as being sold “as-is” and without any warranties. Buyer understands that all automobile insurance and sole financial responsibility for the proper ownership of this motor vehicle will fall solely to the Buyer and that the Seller shall not be liable for any acts or lapses of responsibility on the part of the Buyer.

This agreement shall be governed by the laws of the State of California, the County of Los Angeles, the City of Beverly Hills, and any applicable U. S. laws.

The parties hereby signify their agreement to the terms above by their signatures affixed below:

Leonardo deCapo [date]

[space for Ms. Daughtery to sign and date the contract]

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

U. S. Legal, Inc. (2012). Mail Box Rule Law & Legal Definition. Retrieved from http://definitions.uslegal.com/m/mail-box-rule/

Cornell University Law School (Legal Information Institute [LII]). (2010, August 19). MAILBOX RULE. Retrieved from http://www.law.cornell.edu/wex/mailbox_rule

Richman, B. & Schmelzer, D. (Duke University). (n.d., possibly 2010). When Money Grew on trees: The Untold Story of Lucy v. Zehmer.  Retrieved from http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2979&context=faculty_scholarship

Avvo. (2012). Car dealership has sent me a Notice to Rescind contract. Is there anything I can do? (Unsigned question on legal advice website). Retrieved from http://www.avvo.com/legal-answers/car-dealership-has-sent-me-a-notice-to-rescind-con-536448.html

4LawSchool.com. (2012). Contracts Law Outlines: Mailbox rule. Retrieved from http://www.4lawschool.com/contracts101/mailbox.htm

Smith, C. A. (2012). Acceptance Defined. Retrieved from http://www.west.net/~smith/acceptance.htm

Kirshbaum, D. (n.d.). Legal Forms – (boilerplates.) Retrieved from http://grox.net/misc/legal.forms/index.html

(Paralegal) Employment Contracts

 Employment Contracts

Our case study involves a brand new lawyer, Bud, who has to decide whether or not to accept some unusual verbal agreements offered by Mr. Cheatham of the law firm of Cheatham and Moore. Cheatham either hypothetically tells Bud that his starting salary will be “what [Cheatham and Moore] think he is worth” or tells Bud that he will be paid “the average starting salary paid of new associates at midlevel law firms in their city”. We were asked to determine whether both, either or neither of these offers were valid, and to defend our rationale.

The first offer Cheatham makes to Bud to pay Bud what Cheatham and Moore “think he is worth” would fall under both the “statements of intent (future offers)” and “preliminary negotiations” umbrellas that would render the offer invalid both because no firm terms have been made (and who knows what the company will determine Bud’s “worth” to be in the future regardless of his performance at the job), and (to a lesser extent) because Bud would be foolish not to make a counteroffer–thus rejecting the vague original offer–with a clearly-stated salary request. Cheatham is essentially telling Bud that the company will pay him only what it feels like it should; such a promise is too vague to be binding or satisfactory, and a good contract attempts to avoid any unclear descriptive language that can potentially be interpreted in various different ways by individuals, thus inserting ambiguity into the picture. In re Hubert Plankenhorn 228 BR 638 (ND Ohio 1998), the phrase “a damn good job” was not precise enough to bridge the gap of mutual misunderstanding between a car owner, Larry Browneller, and a car restorer and painter, Hubert Plankenhorn, over what, precisely, each party felt would be a “quality” paint job (Twomey, 2011).

If Cheatham is basing the “average starting salary” only on his personal observations (i.e., his opinion), it is probably not a valid offer and he and Bud will have to reach a definitive mutual agreement regarding the definition of what an “average starting salary” actually is. If Cheatham is basing the “average starting salary” on some verifiable statistics and figures, and if Bud can thus force Cheatham to be pinned down to a particular salary figure, it is a valid offer once Bud accepts it.

Valid contractual offers must contain definiteness (“An offer, and the resulting contract, must be definite and certain” (Twomey, 2011)), which means it must include a precise definition of what the consideration will be. Since Cheatham and Moore are making an offer to Bud which he may or may not choose to accept (or may or may not choose to respond to with a counter-offer), the consideration (in this case, the exchange of Bud’s valuable item, his time and labor, for Cheatham and Moore’s valuable item, a salary) must be clearly defined for the contract to be valid.

Verbal contracts are as legally binding as written contracts in many cases, but are much more difficult to enforce in a court of law if one of the involved parties chooses to breach that verbal agreement, especially if the terms and conditions are not clearly outlined, if there are no witnesses to or recorded evidence of the agreement, and / or if the parties involved have a serious dispute about the terms of the contract (Crystal, 2012). “As I always say, “If it isn’t in writing, it doesn’t exist.” Or, as Sam Goldwyn said, “A verbal contract isn’t worth the paper it’s printed on”” (Murray, 2011).

A binding verbal agreement technically requires merely that the parties have agreed orally that a service will be performed and that remuneration for that service will follow. Common problems with verbal offers of employment:

1. If there is a dispute or misunderstanding, the employee will find it difficult to prove his or her version of events;

2. The employer’s representative who made the offer may no longer hold the same position within the company (s/he may quit, be transferred, or be fired), thus unable to confirm or deny the terms of the agreement;

3. The employer’s representative may not have been authorized to make an offer or that particular offer to the employee and the company may refuse to uphold the agreement on those grounds; and

4. Even if the employee receives an offer letter confirming the offer, there may be problematic “wiggle room” language negating the value of the offer letter as a valid contract such as “terms outlined in this offer letter may be subject to change” or “all employees must abide by employment terms as set forth in the company’s employee handbook” (which is an item a potential employee is unlikely to have access to pre-hire, and which may also be subject to change at the company’s whim) (Dietz, n.d.).

An acceptable employment contract includes details about the express terms relevant to the precise position which has been offered and accepted (such as the responsibilities and expectations the company has for the employee doing that particular job, and whether the job is a full time, part time, contracted, permanent or temporary position) and the exact compensation that will be paid, including benefits such as how many days the employee will be granted for vacation and sick leave, and who will be responsible for filing any relevant tax documents. Such contracts often have implied terms that are dictated by law, such as local custom and practice or by a pre-existing statute (Dietz, n.d.). An implied term could be something such as “it is customary that any employee who wishes to quit must file a two weeks’ notice to the employer” or it could encompass existing legal policies against discrimination or against sexual harassment by superiors directed at underlings (or by workplace peers) which are generally expected to be understood to be applicable to all workplaces in a particular jurisdiction.

Regardless of Cheatham’s intentions (since Bud has applied for a position at a law firm, it is possible Cheatham is making these unusual verbal offers to test how knowledgeable and savvy Bud really is about contracts, how knowledgeable Bud is about the requirements related to and typical salary figures for the position he has applied to fill, and how assertive he is), Bud needs to get any employment offer which he wishes to accept in writing, and to make sure that the terms of any contract for employment lack any problematic ambiguous language but also clearly define both the scope of the position being offered at Cheatham and Moore (what he is expected to do for the firm in exchange for a salary) as well as a specific salary figure (what he can expect to receive for performing specific work duties) and not a vague and (possibly deliberately) subjective promise that he will be paid what the firm decides he is “worth” at some undefined point in the future. Bud should also be wary of accepting a verbal agreement that he be paid an “average starting salary” if what that means, precisely, has not been discussed in detail so that the firm’s representative, Cheatham, and Bud both can understand what an “average starting salary” actually means to all involved parties.

In both cases, the offer needs to be clearly defined (the suggestion that Cheatham and Moore pay Bud what they “think he is worth” is insufficient, whereas the offer to pay Bud an “average starting salary” is slightly more informational but still needs clear definition) and Bud has to clearly accept the terms; lastly, both parties have to agree on the considerations (what Bud is required to do to be paid a particular salary) for either of the contracts to be valid.

 

References

Twomey, D. P., and Jennings, M. M. (2011) Anderson’s Business Law and the Legal Environment. Retrieved from http://digitalbookshelf.southuniversity.edu

Crystal, G. (2012, September). The Law & Verbal Agreements. Retrieved from http://www.contractsandagreements.co.uk/law-and-verbal-agreements.html

Dietz, B. C. (n.d.). Employment Contracts: Everyone needs promise protection. Retrieved from http://www.asktheheadhunter.com/gv050701.htm

Rich, D. (2011, January 17). Is An Oral Agreement Of Employment Enforceable In New York? Retrieved from http://www.davidrichlaw.com/new-york-business-litigation-and-employment-attorneys-blog/2011/01/is-an-oral-agreement-of-employment-enforceable-in-new-york/

Lee, J. (2010, February 25). My Word Isn’t Good Enough? Verbal Job Offers… Retrieved from http://fistfuloftalent.com/2010/02/my-word-isnt-good-enough-verbal-job-offers-final.html

Blackburn, M. (n.d.). We Fight For Fair: Employment Contract Law [in Australia]. Retrieved from http://www.mauriceblackburn.com.au/areas-of-practice/employment–industrial-law/your-employment-contract.aspx

Murray, J. (2011, August 20). Are Verbal Contracts Legal? Retrieved from http://biztaxlaw.about.com/b/2011/08/20/are-verbal-contracts-legal.htm