Unit 3 and 4 C713

Franchise Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

1-5: All these issues depend on the form of organization chosen by participants. Other Features: Established business. Name recognition. Management assistance. Loss of control. Fees may be high.

BREACH OF DUTY is when.....

A defendant breaches his duty of due care by failing to meet his duty of care.

CREATING AN AGENCY RELATIONSHIP happens when...

A principal and an agent mutually consent that the agent will act on behalf of the principal and be subject to the principal's control, thereby creating a fiduciary relationship.

ELEMENTS NOT REQUIRED in an Agency Relationship

An agency relationship can exist without either a written agreement, a formal agreement, or compensation.

Contrast the duties between agents and principals to determine their relationship to each other.

An agent owes these duties to the principal: duty of loyalty, duty to obey instructions, duty of care, and duty to provide information. The principal has three duties to the agent: to compensate as provided by the agreement, to reimburse legitimate expenses, and to cooperate with the agent.

If you were to look online for a description of a professional corporation, you might find websites stressing that, in a PC, shareholders are still responsible for their own wrongdoing. For example: "In some states, these professionals can form a corporation, but with the distinction that each professional is still liable for his or her own wrongful professional actions." Why is this statement at best unnecessary and at worst misleading?

Answer Because in every organization, the professional is responsible for his or her own wrongful acts.

Kristine bought a Rocky Mountain Chocolate Factory franchise. Her franchise agreement required her to purchase a cash register that cost $3,000, with an annual maintenance fee of $773. The agreement also provided that Rocky Mountain could change to a more expensive system. Within a few months after signing the agreement, Kristine learned that she would have to buy a new cash register that cost $20,000, with annual maintenance fees of $2,000. Does Kristine have to buy this new cash register? Did Rocky Mountain act in bad faith?

Answer Yes, she had to buy it—the agreement permitted Rocky Mountain to change systems. It was not a bad faith decision, as bad faith involves a subterfuge or evasion of contractual duties.

____________ ___________ means that a principal is liable for the acts of an agent who is not, in fact, acting with authority if the principal's conduct causes a third party reasonably to believe that the agent is authorized.

Apparent authority

__________ involves an act that makes the plaintiff fear an imminent battery.

Assault

_______ is an intentional touching of another person in a way that is unwanted or offensive.

Battery

The plaintiff must persuade the court that he has suffered a harm that is genuine, not speculative. ________ for emotional distress, without a physical injury, are awarded only in select cases.

Damages

_____________ involves a defamatory statement that is false, uttered to a third person, and causes an injury. Opinion and privilege are valid defenses.

Defamation

_______ _____________ is the intentional restraint of another person without reasonable cause and without consent.

False imprisonment

PROXIMATE CAUSE is when....

For the defendant to be liable, the type of harm must have been reasonably foreseeable.

At approximately 7:50 p.m, bells at the train station rang and red lights flashed, signaling an express train's approach. David Harris walked onto the tracks, ignoring a yellow line painted on the platform instructing people to stand back. Two men shouted to Harris, warning him to get off the tracks. The train's engineer saw him too late to stop the train, which was traveling at approximately 55 mph. The train struck and killed Harris as it passed through the station. Harris's widow sued the railroad, arguing that the railroad's negligence caused her husband's death. Evaluate her argument.

Harris was a trespasser and as a result the railroad had no duty of due care to him. The railroad would be liable only if it caused Harris's death by reckless or intentional conduct. There was no evidence of either. The widow was not permitted to introduce evidence of negligence, because even if the railroad had been negligent, it would be not be liable.

Marko owned a cat and allowed it to roam freely outside. In the three years he had owned the pet, the animal had never bitten anyone. The cat entered Romi's garage. When Romi attempted to move it outside, the cat bit her. Romi underwent four surgeries, was fitted with a plastic finger joint, and spent more than $39,000 in medical bills. She sued Marko, claiming both strict liability and ordinary negligence. Assume that state law allows a domestic cat to roam freely. Evaluate both of Romi's claims.

If Marko's cat had bitten or attacked people in the past, this harm was foreseeable and Marko is liable. If the cat had never done so, and state law allows domestic animals to roam, Romi probably loses her suit for negligence. Her strict liability case definitely fails: a housecat is not a wild animal.

________ ____________ includes authority to do acts that are incidental to a transaction, usually accompany it, or are reasonably necessary to accomplish it.

Implied authority

There is a collision between cars driven by Candy and Zeke. The evidence is that Candy is about 25 percent responsible, for failing to stop quickly enough, and Zeke about 75 percent responsible, for making a dangerous turn. Candy is most likely to win: A lawsuit for battery A lawsuit for negligence in a comparative negligence state A lawsuit for negligence in a contributory negligence state A lawsuit for strict liability A lawsuit for assault

In a contributory negligence state, a plaintiff even 1 percent responsible for the harm loses the case. Candy was 25 percent responsible. She can win only in a comparative negligence state.

The _______ ____ prohibits false statements in commercial advertising or promotion.

Lanham Act

In negligence cases concerning goods, plaintiffs typically raise one or more of these claims:

Negligent design. Negligent manufacture. Failure to warn.

Limited Liability Company Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

No No Charter is easy, but should have thoughtful operating agreement Yes, if the operating agreement permits Varies by state, but generally, yes Becomes taxable entity if it goes public

Limited Liability Partnership Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

No No Difficult No Depends on the partnership agreement N/A

S Corporation Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

No No Difficult Transfer restrictions Yes Only 100 shareholders. Only one class of stock. All shareholders must agree to S status and must be citizens or residents of the United States. Partnerships and corporations cannot be shareholders.

General Partnership Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

No Yes Easy No Depends on the partnership agreement N/A

Joint Venture Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

No Yes Easy No No Partnership for a limited purpose

Sole Proprietorship Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

No Yes Very easy No, can only sell entire business No N/A

A soldier was drinking at a training seminar. Although he was told to leave his car at the seminar, he disobeyed orders and drove to a military club. On the way to the club, he was involved in an accident. Is the military liable for the damage he caused?

No, he was not acting within the scope of employment.

Dr. James Leonard wrote Dr. Edward Jacobson to offer him the position of chief of audiology at Jefferson Medical College in Philadelphia. In the letter, Leonard stated that this appointment would have to be approved by the promotion and appointment committee. Jacobson believed that the appointment committee acted only as a rubber stamp, affirming whatever recommendation Leonard made. Jacobson accepted Leonard's offer and proceeded to sell his house and quit his job in Colorado. You can guess what happened next. Two weeks later, Leonard sent Jacobson another letter, rescinding his offer because of opposition from the appointment committee. Did Leonard have apparent authority?

No. Leonard had told Jacobson that he did not have authority. If Jacobson chose to believe otherwise, that was his problem.

Sarah went to an auction at Christie's to bid on a tapestry for her employer, Fine Arts Gallery. The good news is that she purchased a Dufy tapestry for $77,000. The bad news is that it was not the one her employer had told her to buy. In the excitement of the auction, she forgot her instructions. Fine Art refused to pay, and Christie's filed suit. Is Fine Arts liable for the unauthorized act of its agent? Argument for Christie's: Christie's cannot possibly ascertain in each case the exact nature of a bidder's authority. Whether or not Sarah had actual authority, she certainly had apparent authority, and Fine Arts is liable. Argument for Fine Arts: Sarah was not authorized to purchase the Dufy tapestry, and therefore Christie's must recover from her, not Fine Arts.

Sarah had apparent authority and Fine Arts is liable.

Question: Alan Dershowitz, a law professor famous for his prominent clients, joined with other lawyers to open a kosher delicatessen, Maven's Court. Dershowitz met with greater success at the bar than in the kitchen—the deli failed after barely a year in business. One supplier sued for overdue bills. What form of organization would have been the best choice for Maven's Court?

Sole proprietorship would not have worked, because there was more than one owner. A partnership would have been a disaster because of unlimited liability. An LLP was a possibility, as long as the owners did not anticipate selling their shares. A limited liability partnership would have worked, too. An S Corp would have been possible because the owners could have deducted their losses on this investment from their (substantial) other income and still enjoyed limited liability. The owners would probably not have been troubled by the restraints of an S Corporation—only one class of stock, for example—but the technicalities involved in forming and maintaining an S Corporation can be vexing. Like many start-ups today, Maven's Court probably would have been an LLC.

A new truck, manufactured by General Motors Corp. (GMC), stalled in rush hour traffic on a busy interstate highway because of a defective alternator, which caused a complete failure of the truck's electrical system. The driver stood nearby and waved traffic around his stalled truck. A panel truck approached the GMC truck, and immediately behind the panel truck, Davis was driving a Volkswagen fastback. Because of the panel truck, Davis was unable to see the stalled GMC truck. The panel truck swerved out of the way of the GMC truck, and Davis drove straight into it. The accident killed him. Davis's widow sued GMC. GMC moved for summary judgment, alleging no duty to Davis, no factual causation, and no foreseeable harm.

Summary judgment for GMC denied. GMC owes a duty to everyone on the highway since the possibility of an accident is apparent. There was factual causation: had it not been for the faulty alternator the truck would never have stalled. And this chain of events is entirely foreseeable. GMC need not foresee precisely what happened; only that something like this could happen.

Caudle worked at Betts Lincoln-Mercury dealer. During an office party, many of the employees, including president Betts, were playing with an electric auto condenser, which gave a slight shock when touched. Some employees played catch with it. Betts shocked Caudle on the back of his neck, and chased him around. The shock later caused Caudle to suffer headaches, pass out, feel numbness, and eventually to require nerve surgery. He sued Betts for battery. Betts defended by saying that it was all horseplay and that he had intended no harm. Please rule. Betts argues he intended no harm. Is intent to harm an element?

The court held that it was irrelevant that Betts had shown no malice toward Caudle nor intended to hurt him. Betts intended the physical contact with Caudle, and even though he could not foresee everything that would happen, he is liable for all consequences of his intended physical action.

Benzaquin had a radio talk show. On the program, he complained about an incident in which state trooper Fleming had stopped his car, apparently for lack of a proper license plate and safety sticker. Benzaquin explained that the license plate had been stolen and the sticker fallen onto the dashboard, but Fleming refused to let him drive away. Benzaquin and two young grandsons had to find other transportation. On the show, Benzaquin angrily recounted the incident, and then described Fleming and troopers generally: "we're not paying them to be dictators and Nazis"; "this man is an absolute barbarian, a lunkhead, a meathead." Fleming sued Benzaquin for defamation. Comment. Review the elements of defamation. Can these statements be proven true or false? If not, what is the result? Look at the defenses. Does one apply?

The court ruled in favor of Benzaquin because a reasonable person would understand the words to be opinion and ridicule. They are not statements of fact because most of them could not be proven true or false. A statement like "dictators and Nazis" is not taken literally by anyone.

Texaco, Inc., and other oil companies sold mineral spirits in bulk to distributors, which then resold to retailers. Mineral spirits are used for cleaning. Texaco allegedly knew that the retailers, such as hardware stores, frequently packaged the mineral spirits (illegally) in used half-gallon milk containers and sold them to consumers, often with no warnings on the packages. Mineral spirits are harmful or fatal if swallowed. David Hunnings, aged 21 months, found a milk container in his home, swallowed the mineral spirits, and died. The Hunnings sued Texaco for negligence. The trial court dismissed the complaint, and the Hunnings appealed. What is the legal standard in a negligence case? Have the plaintiffs made out a valid case of negligence? Remember that at this stage, a court is not deciding who wins, but what standard a plaintiff must meet in order to take its case to a jury. Assume that Texaco knew about the repackaging and the grave risk but continued to sell in bulk because doing so was profitable. (If the plaintiffs cannot prove those facts, they will lose even if they do get to a jury.) Would that make you angry? Does that mean such a case should go to a jury? Or would you conclude that the fault still lies with the retailer, the parents, or both?

The standard is whether the defendant acted as a "reasonable person" would have. The appeals court reversed, holding that the plaintiffs had made out a valid negligence claim and were entitled to take their evidence to a jury. Plaintiffs could argue, for example, that Texaco should have provided warnings of the danger, should have discouraged distributors from selling to retailers who illegally packaged the goods in used milk containers, and should have refused to sell to distributors who didn't cooperate.

While drunk, the driver of a subway car plows into the back of the car ahead of him, killing a passenger. It was against the rules for the driver to be drunk. Is the subway authority liable for the negligence of its employee?

The subway authority is liable.

Jonah tells his friend Derek that he would like to go parasailing. Derek suggests that they try an outfit called Wind Beneath Your Wings because he has heard good things about it. Derek offers to arrange everything. He makes a reservation, puts the $600 fee on his credit card, and picks Jonah up to drive him to the Wings location. What a friend! But the day does not turn out as Jonah had hoped. While he is soaring up in the air over the Pacific Ocean, his sail springs a leak, he goes plummeting into the sea and breaks both legs. During his recuperation in the hospital, he learns that Wings is unlicensed. He also sees an ad for Wings offering parasailing for only $350. And Derek is listed in the ad as one of the company's owners. Was Derek Jonah's agent? Has he violated his fiduciary responsibility?

There is an agency relationship: Derek had agreed to help Jonah; it was Jonah who set the goal for the relationship (parasailing); the purpose of this relationship was for one person to benefit another. It does not matter if Derek was not paid or the agreement not written. Derek has violated his duty to exercise due care. He should not have taken Jonah to an unlicensed company. He has also violated his duty to provide information: He should have told Jonah the true cost for the lessons and also revealed that he was a principal of the company. And he violated his duty of loyalty when he worked for two principals whose interests were in conflict.

A supervisor reprimanded an employee for eating in a restaurant when he should have been at work. Later, the employee showed up at the supervisor's office and shot him. Although the employee previously had been violent, management withheld this information from supervisory personnel. Is the company liable for the supervisor's injury? An employer must do a reasonable job of hiring and retaining employees.

This employer may have been liable for negligently hiring a previously violent employee, and it certainly did an unreasonable job in retaining him without advising his supervisor of the earlier violence. The assault was easily foreseeable, and the employer is liable

_______ __________ with business relations involves the defendant harming an existing contract or a prospective relationship that has a definite expectation of success.

Tortious interference

Professional Corporation Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

Yes No Difficult Shareholders must all be members of same profession. Yes, as long as it has shareholders Complex tax issues

Corporation Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

Yes No Difficult Yes Yes N/A

An elementary school custodian hit a child who wrote graffiti on the wall. Is the school district liable for this intentional tort by its employee?

Yes, because the custodian thought he was serving the purpose of his employer.

Close Corporation Separate Taxable Entity? Personal Liability for Owners? Ease of Formation? Transferable Interests (Easily Bought and Sold)? Perpetual Existence? Other Features?

Yes, for C corp; No, for S corp No Difficult Transfer restrictions Yes Protection of minority shareholders. No board of directors required

Al runs a red light and hits Carol's car. She later sues, claiming the following losses: $10,000—car repairs $10,000—medical expenses $10,000—lost wages (she could not work for two months after the accident) $10,000—pain and suffering If the jury believes all of Carol's evidence and she wins her case, how much will she receive in compensatory damages? a. $40,000 b. $30,000 c. $20,000 d. $10,000 e. $0

a

Kurt asked his car mechanic, Quinn, for help in buying a used car. Quinn recommends a Ford Focus that she has been taking care of its whole life. Quinn was working for the seller. Which of the following statements is true? a. Quinn must pay Kurt the amount of money she received from the Ford's prior owner. b. After buying the car, Kurt finds out that it needs $1,000 in repairs. He can recover that amount from Quinn, but only if Quinn knew about the needed repairs before Kurt bought the car. c. Kurt cannot recover anything because Quinn had no obligation to reveal her relationship with the car's seller. d. Kurt cannot recover anything because he had not paid Quinn for her help.

a

Two cars, driven by Fred and Barney, collide. At trial, the jury determines that the accident was 90 percent Fred's fault and 10 percent Barney's fault. Barney's losses total $100,000. If he lives in a state that uses contributory negligence, Barney will recover . a. $0 b. $10,000 c. $50,000 d. $90,000 e. $100,000

a.

An agency relationship ___________ __________ if the principal or agent no longer can perform the required duties or if a change in circumstances renders the agency relationship pointless.

automatically terminates

A limited liability partnership . a. protects partners from liability for their own misdeeds b. protects the partners from liability for the debts of the partnership c. must pay taxes on its income d. both (a) and (b) e. (a), (b), and (c) are all correct.

b

A principal will not be liable to a third party for a tort committed by an agent: a. unless the principal instructed the agent to commit the tort. b. unless the tort was committed within the scope of the agency relationship. c. if the agency agreement limits the principal's liability for the agent's tort. d. if the tort is also regarded as a criminal act.

b

A sole proprietorship . a. must file a tax return b. requires no formal steps for its creation c. must register with the secretary of state d. may sell stock e. provides limited liability to the owner

b

At Business University, semester enrollment begins at midnight on April 1. Jasper asked his roommate, Alonso, to register him for an important required course as a favor. Alonso agreed to do so but then overslept. As a result, Jasper could not enroll in the required course he needed to graduate and had to stay in school for an additional semester. Is Alonso liable to Jasper? a. No, because an agency agreement is invalid unless the agent receives payment. b. No, because Alonso was not grossly negligent. c. No, because the cost of the extra semester is unreasonably high. d. Yes, because Alonso disobeyed his instructions.

b

Sam sneaks up on Tom, hits him with a baseball bat, and knocks him unconscious. Tom never saw Sam coming. He wakes up with a horrible headache. Which of the following torts has Sam committed? a. Assault b. Battery c. Both A and B d. None of the above

b

Jane writes an article for a newspaper reporting that Ann was arrested for stealing a car. The story is entirely false. Ann is not a public figure. Which of the following torts has Jane committed? a. Ordinary slander b. Slander per se c. Libel d. None of the above

c

Keith is driving while intoxicated. He swerves into the wrong lane and causes an accident, seriously injuring Caroline. Which statement is true? a. Caroline could sue Keith, who might be found guilty in her suit. b. Caroline and the state could start separate criminal cases against Keith. c. Caroline could sue Keith, and the state could prosecute Keith for drunk driving. d. The state could sue Keith but only with Caroline's consent. e. The state could prosecute Keith and sue him at the same time for drunk driving.

c

Zack lives in a state that prohibits factory laborers from working more than 12 hours in any 24-hour period. The state legislature passed the law to cut down on accidents caused by fatigued workers. Ignoring the law, Zack makes his factory employees put in 14-hour days. Eventually, a worker at the end of a long shift makes a mistake and severely injures a coworker. The injured worker sues Zack. Which of the following terms will be most relevant to the case? a. Res ipsa loquitur b. Assumption of the risk c. Negligence per se d. Strict liability

c

In a ____________ negligence state, a plaintiff who is even slightly responsible for his own injury recovers nothing; in a ___________ negligence state, the jury may apportion liability between plaintiff and defendant.

contributory, comparative

A limited liability company . a. is regulated by a well-established body of law b. pays taxes on its income c. cannot have members that are corporations d. must register with state authorities e. protects the owners from all personal liability

d

s

d

Compensatory ___________ are the normal remedy in a tort case.

damages

The five elements of negligence are...........

duty of due care, breach, factual causation, proximate causation, and damage.

AN AGENT'S DUTIES TO THE PRINCIPAL

duty of loyalty, duty to obey instructions, duty of care, and duty to provide information.

If the defendant could foresee that misconduct would injure a particular person, he probably has a ______ to her. Special _______ exist for people on the job, landowners, and employers.

duty, duties

The intentional infliction of ________ _______ involves extreme and outrageous conduct that causes serious emotional harm.

emotional distress

The principal grants ___________ ___________ by words or conduct that, reasonably interpreted, cause the agent to believe that the principal desires her to act on the principal's account.

express authority

If one event directly led to the ultimate harm, it is the ________ ________.

factual cause.

The principal is liable for the physical torts of an ____________ ________________ only if the principal has been negligent in hiring or supervising him.

independent contractor

Harm caused by a deliberate action

intentional torts

A principal is _______ for the contracts of the agent if the agent has express, implied, or apparent authority.

liable

Agents are always ________ for their own torts.

liable

An employer is _______ for a physical tort committed by an employee acting within the scope of employment and a nonphysical tort of an employee acting with authority.

liable

A principal is ___________ for nonphysical torts of an employee (whether intentional or unintentional) only if the employee was _____________________________________.

liable, acting with express, implied or apparent authority.

Public personalities can win a defamation suit only by proving actual ______.

malice

If a legislature sets a minimum standard of care for a particular activity in order to protect a certain group of people, and a violation of the statute injures a member of that group, the defendant has committed _______ ____ __.

negligence per se.

An agent is ______ ________ for any contract she makes on behalf of a fully disclosed principal. The principal is _______. In the case of an unidentified or undisclosed principal, both the agent and the principal are _______ on the contract.

not liable, liable, liable

Both the agent and the principal have the _______ to terminate an agency relationship, but they may not have the ______. If the termination violates the agency agreement and causes harm to the other party, the wrongful party must pay damages.

power, right.

In unusual tort cases, the court may award ______ damages, not to compensate the plaintiff but to punish the defendant.

punitive

The principal has three potential remedies when the agent breaches her duty:

recovery of damages the breach has caused, recovery of any profits earned by the agent from the breach, and rescission of any transaction with the agent.

In ________ __________, the injured person need not prove that the defendant's conduct was unreasonable.

strict liability

A defendant is ________ ________ for harm caused by an ultrahazardous activity or a defective product. _______ __________ means that if the defendant's conduct led to the harm, the defendant is liable, even if she exercises extraordinary care.

strictly liable, Strict liability

A principal is not liable for the intentional physical torts of an employee unless....

the employee intended to serve some purpose of the employer; or the employer was negligent in hiring or supervising this employee.

The principal has three duties to the agent:

to compensate as provided by the agreement, to reimburse legitimate expenses, and to cooperate with the agent.

A ____ is a violation of a duty imposed by the civil law.

tort

A defendant engaging in an ____________ activity is almost always liable for any harm that results.

ultrahazardous

Ultrahazardous activities include

using harmful chemicals, operating explosives, keeping wild animals, bringing dangerous substances onto property, and a few similar activities where the danger to the general public is especially great.

An agency relationship can exist without either a _________________, ___________________, and ___________________.

written agreement, a formal agreement, or compensation.