Chapter 2 of 515–25% of exam

Area II: Business Law

Area II tests agency, contracts, debtor-creditor relationships, selected federal regulation of business and business structures. The recurring skill is choosing the right body of law, common law or the Uniform Commercial Code, and applying its rule to a short scenario.

Agency

An agent's acts bind the principal when the agent has actual authority, or apparent authority created by the principal's conduct toward third parties. Employers also answer for employees' torts committed within the scope of employment. Classic traps are secret limits on authority, undisclosed principals and the line between a detour and a frolic.

Apparent authority

Arises from the principal's manifestations to a third party, such as giving someone a title that normally carries a power; limits the third party does not know about do not defeat it.

Restatement (Third) of Agency, as summarized in LII Wex, 'apparent authority'

Undisclosed principal

An undisclosed principal is bound by the agent's authorized contracts; the third party may hold the agent or, once it discovers the principal, the principal.

LII Wex, 'undisclosed principal'

Ratification

A principal who, knowing the facts, accepts the benefits of an unauthorized contract ratifies it by conduct and is bound as if it had authorized it.

LII Wex, 'ratify'

Respondeat superior

An employer is liable for an employee's torts within the scope of employment; a minor detour stays within scope, a frolic for the employee's own purposes does not. Independent contractors are generally outside the doctrine.

LII Wex, 'respondeat superior'; 'frolic and detour'

Contracts: formation, performance and remedies

Common law governs services and real estate; UCC Article 2 governs sales of goods and relaxes several common-law rules between merchants. Formation questions test offer, acceptance and consideration; performance questions test conditions, cure and risk of loss; remedy questions test the damages formulas.

Firm offer

A merchant's signed written offer to buy or sell goods that assures it will be held open is irrevocable without consideration for the stated time, up to three months.

UCC 2-205

Battle of the forms

A definite acceptance with additional terms still forms a contract; between merchants the new terms join the contract unless the offer limits acceptance to its terms, they materially alter it, or the offeror objects.

UCC 2-207

Statute of frauds and modification

Sales of goods of $500 or more need a writing signed by the party to be charged, but a merchant's confirmation binds a recipient who does not object within 10 days. A modification of a sales contract needs no consideration.

UCC 2-201; UCC 2-209(1)

Mailbox rule

An acceptance by an invited medium is effective when it leaves the offeree's possession, even if it never arrives; an acceptance under an option contract is effective only on receipt.

Restatement (Second) of Contracts section 63

Risk of loss and remedies

Absent shipment or a bailee, risk passes on the buyer's receipt if the seller is a merchant. A buyer who covers recovers cover price minus contract price plus incidental and consequential damages, less expenses saved.

UCC 2-509(3); UCC 2-712

Debtor-creditor relationships

Secured transactions under UCC Article 9 turn on three steps: attachment makes the interest enforceable, perfection protects it against third parties, and priority ranks competing claims. Bankruptcy adds the automatic stay, the trustee's avoidance powers and the list of debts that survive discharge.

Attachment

Requires value given, the debtor's rights in the collateral, and a signed security agreement describing the collateral (or the secured party's possession or control).

UCC 9-203(b)

Automatic perfection

A purchase-money security interest in consumer goods is perfected on attachment without filing, except for goods under certificate-of-title laws.

UCC 9-309(1)

Priority

Perfected interests rank by the earlier of filing or perfection; a buyer in ordinary course takes free of a security interest created by its seller even if perfected and known.

UCC 9-322(a); UCC 9-320(a)

Preferences and fraudulent transfers

A trustee may recover transfers on old debts made while insolvent within 90 days before filing (one year for insiders) that let the creditor get more than in Chapter 7; fraudulent transfers reach back 2 years.

11 U.S.C. 547(b); 11 U.S.C. 548(a)

Discharge exceptions

Domestic support obligations, debts for willful and malicious injury, most student loans, and taxes for which no return was filed survive an individual's discharge.

11 U.S.C. 523(a)

Federal regulation and business structures

The blueprint names employment taxes, worker classification, the Affordable Care Act's employer rules, bankruptcy and the Foreign Corrupt Practices Act. Business-structure questions test owners' liability and default management and profit rules under the uniform partnership act and corporate law.

Worker classification

The IRS weighs behavioral control, financial control and the type of relationship; control over how the work is done points to an employee.

IRS, Independent contractor or employee?

Trust fund recovery penalty

A responsible person who willfully fails to pay over withheld taxes is personally liable for 100 percent of the unpaid amount.

IRC 6672(a)

Applicable large employer

An employer averaging at least 50 full-time employees, including full-time equivalents (part-time hours divided by 120 each month), in the prior year; full-time means at least 30 hours a week.

IRC 4980H(c)(2); IRS ALE guidance

FCPA

Bribing foreign officials to obtain or retain business is prohibited; facilitating payments for routine governmental action, such as processing visas, are excepted; issuers must also keep accurate books and adequate internal controls.

15 U.S.C. 78dd-1; 15 U.S.C. 78m(b)(2)

Partners and directors

General partners are jointly and severally liable, but a newly admitted partner is not personally liable for earlier obligations; profits are shared equally by default. Directors acting in good faith on an informed basis are protected by the business judgment rule.

UPA (1997) sections 306, 401(b); LII Wex, 'business judgment rule'

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