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Business Law Final


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An enforceable Contract's 3 Components
LCC Legality Capacity Consideration
Bilateral Contract
Mutuality of obligation. A promise for a promise. Both parties are bound by a promise.
Unilateral Contract
No mutuality. More of an If, Then. The promisor is bound only after promisee has performed the required act.
Express Contract
The intentions of the parties are fully and explicitly stated.
Implied Contracts
The intentions of the parties are inferred based on words, conduct, history, circumstances and the like.
Quasi Contracts
There really isnt’ a contract but the courts try to do what’s fair. Courts say there isnt’ a contract but should be. Ex: If someone does something for me, but we really didn’t discuss the contract, but it wouldn’t be fair for there to be no consideration. Courts say, equitably, Palmer shouldn’t be unjustly enriched. This is usually a one-time deal as opposed to an ongoing relationship (which would be more like an implied contract).
Voidable Contract
Good when drafted but over time invalidate one of the 3 rules of legality, capacity, consideration.
Contracts of Adhesion
The antithesis of a negotiated contract. One party has superior bargaining power. For instance, a credit card agreement or life insurance contract.
Compensatory Damages
That sum of money = to your actual loss because of a breach of contract. Can be more complex than just the actual value of a missed product or something, can be expanded upon because say someone went to another store because you didn’t have the product you ordered from the mfr. This would be an example of consequential damages on top of compensatory damages.
Very small damages. The jury says that what the defendant did was wrong and did cause a breach of contract, but you weren’t really injured, so here’s $10.
Damages awarded above and beyond fair compensatory damages, to punish corporations and deter others from engaging in similar conduct.
Liquidated Damages Clause
The parties to a contract, often a construction or real estate contract, may include a liquidated damages clause that specifies the money to be paid if one of them should later breach the agreement. This will be an estimation of what the expected damages will be. Courts won’t add penalties on top of this, so clauses that try to specify damages higher than actual losses don’t get enforced. The purpose of the contract is to restore the party who lost money to the same position had the contract been performed, not to punish the party who committed the breach.
Uniform Commercial Code set up in the 40s (thought Article 2 wasn't really adopted until the 50s) in recognition of the fact that we're a nation of commerce and need some kind of consistency in commerce-related laws from state to state. So most states have adopted the UCCs major premises but, of course, have minor variations. The important pieces are Article 2, which deals with the Sale of Goods. And Article 2a, which deals with the contracts for lease of goods. It does NOT deal with the selling of land or services, which are still governed by common law principles.
Those things that are tangible or moveable. Dealt with by UCC, as opposed to services or land, which are neither goods nor covered by UCC.
Offer - 3 Components
RDCNT Reasonably Definite Communicated Not Terminated
Offer - Intention
A resonable person would interpret the offer to be serious. If an offer is made in the heat of argument or as a joke and can reasonably be determined to be so, then it's not an offer. Advertisements are not offers, but merely an invitation to negotiate based on supply and reasonability. (So the dealer doesn't have to have the car at the price it advertises... crap.)
Offer - Definite
An offer must be definite, meaning that essential terms, such as price, subject matter, duration, payment) must not be left open.
Offer - Communicated
An offer must be communicated. Therefore, a good Samaritan who returns a pet can't claim a reward if they didn't know about it beforehand.
Offer - Not Terminated
An offer can be terminated by lapse of time (ie 5 years later you can't claim something) or an Act of God (there was a forest fire that destroyed the fire I said I'd sell you.) Death or incapacitation of either party can terminate, as well as destruction of the item in question (so my car gets burnt to a husk, I still can't try to force you to pay what you said you'd pay for it). An offer can also be terminated by the person getting the offer making a counteroffer.
Offer - Mirror Image Rule
This basically says the the only way an offer can be accepted is if it's accepted exactly how it was offered. If someone says, "Yes, but I'll take it if you put a pool in the back," that's not an acceptance of the offer, but rather a counteroffer which terminates the original offer.
Mailbox Rule
This basically says that I accept an offer from the moment I put it in the mail on its way to you. "Acceptance is viewed to take place upon dispatch."
Each side to a contract must provide something new of value, be it money, an object, a promise, a service, or even giving up the right to do something. A promise to do something illegal, ie prostitute onself, is not valid consideration. A promise to do something that's already been agreed upon is also not valid consideration, as it's not new consideration. Quid pro quo. Something for something.
Pre-existing obligations-Modification of contracts
This basically revolves around the fact that changes to a contract HAVE to involve new consideration. So, if you and I agree I'll put in a grey marble countertop for $500 and make a contract and then you mention you want black before you leave for Europe, you can't get pissed when you come back and have a grey one, because there was no new consideration in that contract modification
Contracts: Accord and Satisfaction
This basically speaks to the fact that contract changes must be agreed upon by both parties and any new consideration must be to the satisfaction of both parties. Accord means we agree, satisfaction means the contract is considered completed, ie debt fully paid, etc.
Void (Illegal) Contract
A contract is void if it is illegal or against public policy. A contract can also be void if it was entered into by an incompetent person legally judged so.
Licensing Statutes
If a licensing statute is regulatory it is meant to regulate the actions of a particular trade, for instance to dispense pesticides in the state of Georgia you need a particular license that says you will do so in a certain safe manner. This also means you HAVE to have the license to do business and a contract can be voided if you don’t If a licensing statute is revenue raising, it is based on licensing fees, ie a business license with the secretary of state, which says you need to get this license to do business in the state of georgia, but doesn’t have much to say about exactly how you run that business. The lack of this type of license also can’t invalidate a contract, so if a lawyer doesn’t have a business license, you can’t refuse to pay him for that reason.
Restrictive Covenenan-Covenant Not to Compete
An agreement that’s usually part of an employment contract or contract when seeling a business, where the person signing agrees not to compete with the company for some time or in a particular area of business. Also called a noncompete. Somewhat controversial and subject to state law. This is common law and very sketchy. There’s a three part test: Time-reasonable?/Geographic span-reasonable/need for protection-reasonable?
blue penciling
A court may change an item in a non-compete agreement to a value, time range, geography range, etc that is more reasonable. So they won’t necessarily throw the whole noncompete out the window and render it invalid, but they may say that 10 years is too long, or the entire US is too large an area and they might shrink those down to a more reasonable value.
Fraud or Duress
Contracts can be rendered unenforceable if there was no true meeting of the minds, no true assent, based on either fraud or duress. If someone made the decision to agree to a contract based on intentionally fraudulent information, then it's unenforceable. If they were forced to enter into it because fear caused by threats of extortion or blackmail, it's unenforceable.
Contracts that must be in writing
These are contracts subject to the statute of frauds and include: oLand (Equal Dignities Rule) oContracts taking longer than one year oPromises to pay the debts of another oPre-nuptial agreements oSale of Goods in excess of $500.00 (500 PLAY, $500, PRENUP, LAND, ANOTHERSDEBTS, YEAR)
Condition Precedent
A condition that must be met before a party has to perform under a contract.
Condition Subsequent
In contracts, this is a provision that gives one party the right to stop performing and stop having liability if the other party fails to meet the obligations. So, the don’t do right, AFTER then fact I can stop. So an example might be I agree to give you a job, but then give you a drug test in the first week. You fail, you lose job. Condition subsequent.
Condition Concurrent
Conditions that are mutually dependent and to be performed at the same time or simultaneously.
Substantial performance vs. Total performance
So, this is like in a construction contract, you can show you “substantially” performed on this building and the fact that I didn’t *exactly* match total performance. So I can’t refuse to pay for a swimmnig pool because the actual depth wound up being ¼ inch shorter than I was promised. This keps us closer to reality.
Injunctive relief
Basically an emergency meeting to get a judge to determine that someone’s breaking a contract as you speak and could be causing serious trouble.
Employment At Will
Concept that’s been around since the 1870s that says that an employment agreement of indefinite duration is an at-will contract. This means basically that, since the employee has the right to quit at any time, then the employer has the right to discharge the employee at any time without notice. In many states today, however, the at-will rule has been buried under exceptions. In GA, it remains quite strong.
Public Employees
A class not subject to the at-will employment rule. These employees generally work under civil service or merit systems that provide for tenure, require just cause for discharge, and guarantee administrative proceedings to determine if there is just cause for discharge. This was put into place to ensure that the moment a new elected official was brought into office, he or she wouldn’t just fire everyone who kept the day-to-day operations running and bring in employees all supportive of his/her flavor of politics. This helped to keep government running.
Employees with Individual Contracts
A class not subject to the at-will employment rule. Generally, most peons don’t have individual contracts. But, for instance, sports players and professors with tenure have individual contracts that exempt them from at-will employment status. These contracts generally have clauses that require just cause, severance pay, and other considerations generally not available to the masses.
Union Contracts
A class not subject to the at-will employment rule. These were a product of 20s and 30s. After WWII, unions made up about 45% of workforce—today it’s 6-7%. Union contract says: There’s a presumption you’ll do your job well. If the company thinks you’re not, then the company has to file a complaint that goes through a union process involving outside arbitrator.
Public Policy Exception
Most states have this exception, but depends on the state. It says that if someone is trying to do what is right, ie what is honorable or legally or ethically right, then they can’t be fired for doing this. IE, many states have exception for accountants who get fired for not agreeing to cook the books. States in the South continuing to want to be totally at-will, and so often don’t have these exceptions, including Georgia, Alabama, LA, and FL.
Whistleblower Statutes
These also vary from state to state, but are basically statutes that protect employees who report illegal activities going on within their company that are against the public interest. A primary case here was Collins vs Beazer Homes, where Judy Collins gets hired for Beazer and figures out they were making under the table payments to a company in Jacksonville. She reported this to the VP and was fired. She brought her case under the SOX act of 2002, which has several whistleblower provisions.
Implied Covenant of Good Faith and Fair Dealing
Not available in most or even many states. They basically revolve around the companies trying to terminate employees to get out of paying bonuses or something like that. They had a good faith deal with the employee to pay him those bonuses and so firing him just to keep from paying them is considered wrong in some states. These generally only cover the breach of the implied covenant, there are generally no remedies for damages above compensatory or punitive damages.
Fraudulent Inducement
Businesses can be held liable for overzealous sales pitches to attract highly qualified personnel. In the case, Lazar v. Rykoff-Sexton, the Lazar was convinced by someone working for the restaurant company to come work for them. He quit the steady family business, moved his family to LA, did a goodjob, and was given none of the compensation promised him and let go within two years. He sued and won based on fraudulent inducement. This is very similar in this case to detrimental reliance: Lazar relied upon their promises to his own detriment.
Preserving at-will employment rights from a company’s perspective
The company should be careful to reserve rights related to discharge in their written personnel policy (and get the employee to sign it upon employment!) and make sure that those policies are consistent with anything written in an employee handbook/manual. Any kind of progressive discipline should be explained fully and the employee told these policies are within the discretion of the company. Arbitration and internal grievance clauses are permissible and should be explained fully and be unique to the company. If they’re generic or “boilerplate” then they may be found to be invalid.
White Collar Exemptions
This relates to Minimum Wage and Overtime. Exempt Employees -for example: salespersons, and executive, administrative, and professional employees. These exemptions are intended to protect company from having to pay overtime to someone whose work is really measured in actual output and not necessarily strict time. There’s also the implicit idea that minimum wage wouldn’t really apply to any of these types of positions. The danger for the employee is that in today’s service-oriented economy, it’s quite easy for many if not most positions to be characterized as “professional” or "administrative" ones, thereby leaving the employee without any recourse as to overtime.
Employers Giving Recommendations for Former Employees to Potential Future Employers
Conditional privilege (defense) to defamation actions protects former Employers if the information given to future Employers is fair and in good faith and not published to third parties. Also, Employers may be protected if the Employee signs a waiver and release. Need to be careful to avoid defamation that could result in litigation.
Employer Testing and Surveillance
It has limited usefulness to the employer and can be problematic for the employer. If it is done, it needs to be done uniformly, ie you can’t single any one person or group out or there could be grounds for dismissal of this evidence. Some of the challenges to testing include: • Breach of contract. • No justification. • Violates privacy. • False accusation. • Emotional distress. • Racial discrimination
Drug Testing
Drug testing is subject to the same challenges to general surveillance: Breach of contract, No justification, Violates privacy, False accusation, Emotional distress, Racial discrimination. There is protection for public employees (none for private employees) from drug testing as it’s considered a violation of 4th Amendment protection from unreasonable search and seizure and the right to privacy. However, if any public employee falls under the following categories, this does not apply: • Involved in any way in Public transportation • Carry firearms • Public School teachers Possibly understandably so, these groups can be subject to drug testing as their rights under the 4th amendment are outweighed by public policy needs. There are also very serious considerations to made with regards to chain of custody of the urine sample in question—this has lost cases for employers before.
Health screening and genetic testing
Very troublesome area and probably one for employees to avoid anytime in the near future. 31 states and the entire federal government (for their own hires) have outlawed genetic-based discrimination in the workplace. There may also be a Title VII-based discrimination case if the genetic predisposition is something associated with gender or race. Additionally, if the genetic predisposition is held to relate to disability, then the EEOC would argue that these individuals or groups qualify for ADA (Americans With Disabilities Act) protection, and would bring suit.
Polygraph testing of employees
The Employee Polygraph Protection Act (EPPA) of 1988 makes it generally unlawful for employees to use polygraph exams. This right may be waived if the employee signs a waiver, but even then some states have statutes that don’t allow them in any case. Polygraphs are notoriously troublesome, even in criminal law, and most courts no longer consider their results admissable or even considered scientifically defendable. Most companies would be better off just letting the local police take care of this if they choose to pursue it at all.
Employee surveillance
There is very little expectation of privacy in the workplace. Employers have a legitimate interest in employee productivity, but surveillance may violate the employee’s privacy rights, so it’s important to be careful. Some reasons an employer might legitimately decide to engage in surveillance are: To conform to regulations—so the telemarketing industry, which is heavily regulated, might listen in on employees’ phone calls to ensure they’re complying with regulations. To avoid liability—if an employee sees something potentially harmful or that might constitute a hostile workplace environment (female employee ses porn on male employee’s computer) then the company might be opening itself up to lawsuits if it didn’t make a reasonable effort to ensure that stuff isn’t going on. To Promote security—related to protecting trade secrets and confidential info. It’s still a very open area, but some of the considerations courts have looked at are: whether the employee has an exclusive working space (so shared areas are almost definitely subject to surveillance); nature of employment; whether the employee was told parts of the workplace was subject to surveillance.
The Occupational Safety and Health Act was passed in 1970 to require employers to establish safe and healthful working environments. The agency (also called OSHA-Administration, not Act) governs things like exposure to hazardous chemicals, protective gear, fire protection-extinguishers, etc, and workplace temperature and ventilation. The interesting thing here from the employee’s perspective is that there’s very little recourse for compensation for an employee harmed by lack of workplace safety. OSHA can come in and fine the employer some sum of money, but an employee harmed, even for life, in an accident has to be content with worker’s compensation. OSHA also rarely, rarely refers any cases for criminal prosecution, even when there’s great evidence of willful neglect of worker safety. Another note of interest is that Carpal Tunnel Syndrome or other repetitive stress injuries fall under OSHA purview.
Worker’s Compensation
Required if you have more than four employees, worker’s comp provides benefits related to a worker’s loss of earnings and any medical care for life as it relates to that particular injury. Receiving worker’s compensation generally negates any claim on the employee’s part for any sort of civil litigation compensation. The tradeoff is that employees receive benefits and medical benefits sooner and more methodically than if they were able to sue the company, which also protects the company from expensive lawsuits. Cases have found that heart attacks caused by stress on the job can fall under worker’s compensation claims.
The federal Fair Labor Standards Act originally passed in 1938 and has been amended many times since. It covers minimum wage, overtime, and child labor. There are also many state laws relating to these areas, and generally the stricter law will apply. Independent contractors are not covered, but any company engaged in interstate commerce is.
Minimum Wage
First established by FLSA in 1938 at $.25 an hour, this has risen to $6.55 os of July of 2008. Many states have different laws. For example, California’s minimum wage is currently $8 an hour. Again, independent contractors need not apply.
Originally a part of the 1938 FLSA, overtime provides for compensation, usually time and a half, for time worked above a 40 hour work week. The key here is that there are many exempt classes from this legislation, including executive, administrative, professional, computer, and outside sales. The danger for the employee is that in today’s service-oriented economy, it’s quite easy for many if not most positions to be characterized as “professional” or “administrative” ones, thereby leaving the employee without any recourse as to overtime. There are no limits in the FLSA on hours worked.
Child Labor
Don’t do it. It’s bad. Kathy Lee Gifford. Originally provided for under the FLSA of 1938, the child labor law says you can’t employ anyone under the age of 14. If they’re 14-15 they can only work outside school hours and only in some occupations.
Equal Pay Act
Of 1963. Requires equal pay for equal work without regard to gender in companies of more than 20 employees. When the act was passed women made about 65% of what men made, in a 2000 survey, that had gone up to 80%.
Civil Rights Act
Of 1964. Title VII is the important part, which prohibits discrimination on the basis of RCRNOS Race, Color, Religion, National Origin, Sex It was later amended to include any discrimination on the basis of pregnancy or childbirth. Covers all public and private employers with 15 or more employees. Includes all government. There were two cases immediately following the act to challenge it, but basically the courts said that any company engaging in interstate commerce fell under the law. So this meant that even if your little restaurant in Alabama bought plastic forks from a company in New Jersey, you were engaging in interstate commerce and fell under the jurisdiction of the federal act.
Age Discrimination in Employment Act
Of 1967. ADEA Protects persons 40 years and older from discrimination on the basis of age. Amended in 1990 by Older Workers’ Benefit Protection Act to prohibit age discrimination with regards to employee benefits and establishes minimum standards for one to waive one’s rights. Covers all public and private employers with 20 or more employees.
Of 1990. Americans with Disabilities Act. Prohibits discrimination on the basis of a person’s disability. Requires businesses to provide reasonable accomodation to the disabled unless the accommodation would result in “undue hardship” to business operations. So, do I have to change my entire production line because one employee can’t stand? Nope. But I do have to have ramps into offices, etc. Disabled should have access to employment, transportation, public accommodations, and telecommunications. Covers all private employers with 15 or more employees. Claims are treated like Title VII, EOCC investigates claims.
Family and Medical Leave Act
Of 1993. Allows employees to take time off from work to handle domestic responsibilities, such as birth of a child, adoption of a child, or care of an elderly parent. Employees are guaranteed job security despite these familial responsbilities. Covers private employers with 50 or more employees at work sites within 75 miles of one another (so Subway sandwich shop couldn’t say they didn’t have 50 employees if they 10 stores with 5 each within a 75 mile radius). Also, employees must have worked for 12 months and at least 12,500 hours. They’re eligible for up to 12 weeks a year and, if suit is brought the company is required to restore them to same position or equivalent with pay, benefits, etc. Part-time employees are excluded and not counted towards the 50 required.
Equal Employment Opportunity Commission is the primary enforcer of civil rights legislation in the US. • 5 member commission, 3 appointed by prez for specific terms from one party and 2 from another party • Makes regulatons and recommendations based on equal opportunity • Investigates wrongdoing All cases related to discrimination go through EEOC, so you cant just sue right away. The agency is pretty useless these days, as it just stops everything for 180 days, then says, we couldn’t come to a resolution on this, so go ahead and sue if you want.
Disparate Treatment
Under Title VII, bringing a case under this legal theory seeks to prove that a person was intentionally discriminated against based on his membership in a protected class (race, color, religion, origin, or sex). The person has to prove they are a member of a protected class and were fired or denied a promotion or position to get the case heard and then it’s all about evidence after that.
Disparate Impact
This legal theory under which to bring a Title VII case basically says that there’s a statistical difference in how a certain protected class of employees is treated based on some company policy. So this is generally where a company policy, whether it’s intended to discriminate or not, can be proven to be doing so based on statistical proof, then the class has a case. For example, if a security company has a policy of hiring only above 5’8”, who weigh more than 150 pounds, they’re not coming right out and saying they won’t hire Asian-American males or females. But statistically this is the case and so the class has a suit.
Sexual Harassment
Two types: Quid Pro Quo—where an employee gives sexual favors in exchange for job benefits. And Hostile Work environment—where the workplace is poisoned by conduct that makes an employee be less productive. The classic example here is a workplace in which male “boys will be boys” behavior such as telling raunchy jokes or patting females on the behind or, more subtly, making seemingly innocuous comments that tend to sexualize women. There are tests for pervasiveness to define a workplace as hostile: 1. Frequency and severity of discriminatory conduct 2. Whether it’s physically threatening or humilating 3. Whether it unreasonably interferes with an employee’s work performance Affirmative Action Defense: If a company can show 1. That they exercised “Reasonable Care” to prevent and correct the harassing behavior. So, if they require employees to watch videos defining their sexual harassment pollicy and what it means or disciplined an employee acting improperly. 2. The plaintiff/employee failed to take advantage of these preventative measures. IE, if they just suffered in silence and didn’t tell anyone what was going on. then the company may have a defense.
Duty to Accomodate Religious Beliefs
Under Title VII of CRA of 1964, employers can’t discriminate on the basis of religion. Claims can involve refusing to hire someone based on their religion and not provide any kind of scheduling to accommodate beliefs and practices. So, if they’re trying to force a Jehovah’s witness to work on Saturday, they could have trouble. The employer’s affirmative defense here is that they did try to make “Reasonable Accomodation.”
Bona Fide Occupational Qualification. This basically says that if a job requirement is necessary, they can discriminate based on ability to perform this job function. Goes mostly to gender. IE, if I’m hiring for a restroom attendants for all of my female restrooms, then yes, I can hire a woman and choose not to hire a man. But I can’t just say, “Chicks are hotter, so let me hire only hot chicks.”
Seniority and Merit Systems
These are not covered under Title VII, provided that there is no intentional desire to discriminate. So, it’s ok to pay people more based on time with the company and performance.
Affirmative Action
These programs are generally viewed as means of remedying past acts of discrimination, and often established due to court orders, court-approved consent decrees, or federal and state laws that impose affirmative-action obligations on government contractors. Executive Order 11246 requires federal government contractors to include in every government contract not exempted: 1. Not to discriminate in employment based on protected class (RCRNOS) 2. To take affirmative steps to prevent discrimination 3. To file equal opportunity surveys every year Individuals don’t have any right of action based on a violation, but severe sanctions can be imposed if a contractor violates these principles. In some instances, including the school board who decided to keep more minorities then equally qualified non-minorities, affirmative action plans are struck down. They can be maintained if they 1. Are designed to break down patterns of segregation and hierarchy 2. In one particular case, “did not unneccessarily trammel the interests of white employees” 3. Are a temporary measure to attain rather than maintain racial balance
Secured Transactions
Article 9 of the UCC sought to bring under one umbrella all types of loans or other transactions secured by collateral. Before that, there were chattel mortgages, factor’s liens, pledges, conditional sales, etc. Types of collateral can include: 1. Tangible (Actual Goods) 2. Quasi Tangible (Notes, instruments)… Stocks in another company 3. Intangible Some things not covered are liens on real property, and there are other federal and state laws that preempt the UCC on things like ship mortgages or aircraft liens.
This applies to collecting on collateral under a secured transaction. It basically says there are two ways to have possession of a collateral: 1. Posession (you hold the watch that guarantees the agreement). But you can’t hold my Accounts Receivable. 2. Security Agreement – So this is where you would “hold” my AR. Since it’s somewhat intangible.
1. Posession 2. Filing of Financing Statement (this is a race to notice) so it is being the first to file if there are multiple creditors. (This is called filing a UCC1.) 3. Purchase Money/Security Interest If perfect by filing, good for 5 years with continuation statement allowed within 6 months of expiration date for additional 5 years. Unperfected security interest no good as to perfected security interest.
Chapter 7 Bankruptcy
This implies total liquidation of a company that has become insolvent. The Debtor’s nonexempt property is sold for cash, the cash is distributed to the creditors and any unpaid debts are discharged. Companies used to file Chapter 11, but in today’s environment, they’re having to file 7, because there’s no money to help them restructure as they would have historically under a chapter 11. • Voluntary • Involuntary $12,300 is the minimum to be forced into involuntary bankruptcy.
Bankruptcy Procedure – High Level
Filing a petition, which can be voluntary (by the debtor) or involuntary (by the creditor). An automatic stay is put into place. There’s the first meeting of the creditors, the 341 meeting. In chapter 7, a trustee is put into place. In chapter 11 (restructuring), the company and its holders generally continue to run things, and are called the DIP, or Debtor-In-Posession. The creditors put in Proofs of Claim, and exempt property is set aside if there is any. Discharge then takes place, after nonexempt property is liquidated and distributed equitably to creditors, remaining debts are discharged, and debtor gets a fresh start.
Basic dignity clause
Relates to bankruptcy proceedings and basically says that you can’t sue the clothes off my back, ie I must have some dignity remaining. And there are state to state rules that say if you’ve got enough invested in your home, you can probably keep it.
Automatic Stay
This is one of the biggest and immediate advantages of filing bankruptcy, and often it is the motivating factor behind corporations to do so. It instantly suspends most litigation and collection activities against the company. So, Delta filed for bankruptcy when many of its lendors decided to call their loans in the same time frame. Dow Corning filed when they had 19,000 lawsuits from women claiming damages from breast implants. Exceptions to the stay: 1. Certain securities and financial transactions are not stayed. This goes to the fact that a bank can still seize a company’s bank account, because that’s not the company’s money, simply a promise on the part of the bank to pay that amount. If that amount could be setoff by a loan from the bank to this company, then it doesn’t necessarily get protected by the automatic stay. 2. Criminal action against the debtor. 3. Doesn’t stop a government’s police or regulatory power.
Filing a petition for Bankruptcy
Voluntary—debtor files. Includes: 1. A list of secured and unsecured creditors 2. A list of all property owned by debtor, including any they claim is exempt 3. A statement of financial affairs of the debtor 4. A list of debtors current income and expenses Involuntary—one or more creditors files with the bankruptcy court. Where $12,300 is the minimum amount to be forced into involuntary bankruptcy. 1. Can be filed by any creditor if there’s 12 or fewer creditors 2. Must be signed by 3 creditors if there’s more than 12 creditors 3. Then the debtor must file the same things as above
First meeting of the creditors
Called a 341 meeting, this is the first meeting of the creditors and the debtor. No earlier than 20, no more than 40 days after order for relief is granted. The bankruptcy judge cannot attend, but the debtor must appear and answer questions. This is usually the only time in court for the debtor.
The trustee is appointed initially in Chapter 7 cases (and in Chapter 11 when DIP is replaced due to fraud, dishonesty, or gross negligence), and is appointed for the court when an order for relief is granted. He becomes the legal representative of the debtor’s estate. This person asks a lot of questions. Should this person even be in bankruptcy? 7 vs 11? He asks about assets, liabilities? Fraudulent transfers? So, if the husband transfers assets off, etc. If you’ve settled any huge debt within 90 days it can be pulled back in so there’s an equitable division. If it was to an insider or family member it can be pulled back in up to a year.
In chapter 11 cases, the debtor is left in place to operate the business and is called the DIP, or debtor-in-posession. The DIP has the same powers as the trustee but is left in place to operate the business. A Trustee can be appointed by the Court upon a showing of cause such as fraud, dishonesty or gross mismanagement by Debtor.
Proof of Claim
Secured property is discharged first in a bankruptcy proceeding. After this, unsecured creditors must file a proof of claim stating the amount of their claim. Pre-printed piece of paper, sent into clerk of the court, “I’m so and so, and this person who’s filing bankruptcy owes me this.” And so if assets are discovered 3 years down the line, I can recoup something.
Exempt Property
Corollary to the basic dignity clause, exempt property is intended to provide for the debtor’s future needs and generally includes an interest up to a specified amount in their house and burial plots (the homestead exemption), one car, certain household goods and personal items, some deposits or cash, tools or books used in their trade, life insurance policy, government benefits (like SS, veteran’s disability), alimony, etc. There are some state laws that are even more lenient in this area.
Chapter 13 Bankruptcy
This is for individual wage earners who need to file bankruptcy and is generally voluntary. A rehabilitation form of Bankruptcy that permits the Court to supervise the individual’s plan for repayment of unpaid debt by installment. Can file so long as they owe less than 900K in secured and 300K in unsecured debt. They file a petition the same way as a voluntary chapter 7. Have to file a plan of repayment up to 5 years. Payments go to a trustee, who pays creditors.
Chapter 11 Bankruptcy
A method of reorganizing Debtor’s financial affairs under the supervision of the Bankruptcy Court. Its goals are to rehabilitate a trouble debtor company and to maximize return to creditors. The procedure is similar to Chapter 7 in that there’s a filing of petition, first meeting of the creditors, filing of proofs of claim, and the automatic stay. In most cases, the company maintains the business and acts as the trustee as a DIP, unless there’s fraud, dishonesty, or gross negligence, at which time the court appoints a trustee. Usually, a first priority is to shed undesired leases and to once again obtain credit.
The Court will appoint this Committee which is usually composed of creditors holding the seven largest claims of unsecured debt.
This says that contracts that have not been fully performed or unexpired leases can be assumed (kept and continued under current terms) or rejected (broken without financial harm). This is often one of the primary reasons companies enter into chapter 11—they have many unfavorable leases and they want to discharge them without huge expense.
Gives you enough data to make an informed decision based on two things: What the unsecured creditors committee recommends, and what are the financial data of the company?
This is a plan set forth by either the debtor or one of its creditors, or both in conjunction. If the plan meets statutory requirements and is approved by the creditors and the Court, it becomes a master contract that redefines the legal relationship among all parties who have claims against the debtor, even those who don’t consent to its terms. … and the “cram down” powers of the Court ?

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