Business Law (part 55)

Collecting more taxes than is absolutely necessary is legalized robbery.

Calvin Coolidge

Bankruptcy (part A)

by

 Charles Lamson

 Bankruptcy is a judicial declaration as to a person's (the debtor's) financial condition. Federal bankruptcy law has two very definite purposes: to give the debtor a new start and to give creditors an equal chance in the collection of their claims.

An honest debtor, hopelessly insolvent, may be tempted to cease trying even to earn a living. By permitting an insolvent debtor to give up all assets within a few minor exceptions and thereby get forgiveness of the debts, at least a new start can be made. The court prescribes an equitable settlement under the circumstances and when these conditions are fully met, the debtor may resume full control of any business.

It is unfair to permit some unsecured creditors to get paid in full by an insolvent person while others receive nothing. By appointing a trustee to take over the debtor's property and pay each creditor in proportion to a claim, the trustee seeks to achieve a more equitable settlement. The arrangement promotes equity, wastes fewer assets, and costs less money than for each creditor to separately sue the debtor. 

Who Can File a Petition of Bankruptcy?

Today any person who lives in, or has a residence, place of business, or property in the United States can be a debtor under the bankruptcy code except banks, insurance companies, savings and loan associations, and some municipalities. Rehabilitation proceedings may be instituted against all of these exempted institutions except municipalities, but the proceedings may not be filed under the Bankruptcy Code. There are several chapters under the code and only specified persons may be debtors under the particular chapters. Chapter 7, providing for liquidation, applies to any person; Chapter 9 applies to municipalities; Chapter 11, providing for a reorganization, applies to any person; Chapter 12 applies to farmers; and Chapter 13 applies to individuals with regular income.

Kinds of Debtors

There are two kinds of debtors:

1. Voluntary
2. Involuntary

Voluntary Debtors

Anyone, except the institutions listed previously, may file a voluntary petition with the bankruptcy court under one of the four chapters of the code. A husband and wife may file a petition for a joint case.

Involuntary Debtors

Under certain conditions one may be forced into involuntary bankruptcy. Generally, if a debtor has 12 or more creditors, three must join the petition for involuntary bankruptcy. If a debtor has fewer than 12 creditors, one may sign. The creditors who signed must have aggregate claims amounting to $10,000 in excess of any collateral held as security. The claims may not be contingent or subject to a valid dispute. Involuntary petitions may not be filed under chapters 9 or 13 or against farmers and charitable corporations. However the court can, without the debtor's agreement, convert a voluntary filing to a filing under another section of the bankruptcy law that could not be filed involuntarily.

A court will enter an order for relief upon the filing of an involuntary bankruptcy petition if either of the following two situations exists:

1. The debtor does not pay debts as they become due.
2. A custodian of the debtor's assets was established within 120 days preceding the filing of the involuntary petition.

Bankruptcy law uses the same procedure in liquidating the estate whether under a voluntary bankruptcy proceeding or an involuntary one. The filing of a petition automatically stays, or prevents, the filing or continuation of proceedings against the debtor that could have been begun or were to recover a claim against the debtor that arose before the bankruptcy petition. 

Procedure in a Liquidation Case

After filing a petition in bankruptcy, creditors must be notified and a meeting of them called. These creditors elect a trustee to take over all the assets of the debtor. The trustee steps into the shoes of the debtor and collects all debts due to do the debtor, preserves all physical assets, sues all delinquent creditors of the estate, and finally distributes all money realized according to a definite priority that will be discussed later.

Exempt Property

The federal bankruptcy law lists property that will not be used to pay debts. In addition, each state has laws exempting property from seizure for the payment of debts. The debtor has a choice between federal or state exemptions unless state law specifies state exemptions must be used. The most common types of property excluded include a limited interest in a residence and vehicle, household effects, tools of the trade, such as a carpenter's tools or dentist equipment, and similar items within reasonable limits. The debtor may also exclude unmatured life insurance contracts owned other than credit life insurance.

Most states specifically exempt all necessary wearing apparel for the debtor and members of the family, such items as the family bible, and pictures of the members of the family even though some of these may be portraits of some value. Many of the federal exemptions set a limit on the value of items that may be excluded. 

Included Property

The law includes some property acquired by the debtor after the bankruptcy proceedings have been instituted in the debtor's estate and uses it for the payment of creditors. This includes property acquired by inheritance, divorce, or as a beneficiary of life insurance within 180 days after the date of filing. 

If the debtor transfers property, normally within 90 days preceding the filing of the bankruptcy petition, to one creditor with the intent to prefer one creditor over another, and the debtor is insolvent, the transfer may be set aside and the property included in the debtors estate. Such a transfer that is disallowed is called a preference. If the creditor is a relative, a transfer made up to a year before the filing can be a preference.

Duties of the Debtor

The debtor must cooperate fully with the trustee. When requested, the debtor must attend creditors' meetings and must furnish all relevant evidence about debts due. The debtor must file with the trustee a schedule of all assets and all liabilities. This schedule must be in sufficient detail so that the trustee can list the secured creditors, the partially secured creditors, and the unsecured creditors. Failure of the debtor to cooperate with the trustee and to obey all orders of the trustee not only may prevent discharge from bankruptcy but may also subject the debtor to criminal prosecution for contempt of court.

Proof of Claims

All unsecured creditors must present proof of their claims to the court. The court sets a deadline for filing proof of claims, but they must generally be filed within 90 days after the date for the first meeting of creditors. 

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 482-485*

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Business Law (part 54)

It is not wisdom but Authority that makes a law.

Thomas Hobbes

Security Devices (part A)

 Bye

 Charles Lamson

The next couple posts discuss two types of security devices: (1) guarantee and suretyship contracts and (2) secured credit sales.

Guarantee and Suretyship

A contract of guarantee or suretyship is an agreement whereby one party promises to be responsible for the debt, default, or obligation of another. Such contracts generally arise when one person assumes responsibility for the extension of credit to another, as in buying merchandise on credit or in borrowing money from the bank. 

A person entrusted with the money of another, such as a cashier, a bank teller, or a county treasurer, may be required to have someone guarantee the faithful performance of the duties. This contract of suretyship is commonly referred to as a fidelity bond.

In recent years bonding companies have taken over most of the business of guaranteeing the employer against losses caused by dishonest employees. These bonding companies are paid sureties, which means they receive money for entering into the suretyship. The bonding companies obligation arises from its written contract with the employer. This contract of indemnity details the conditions under which the surety will be liable.

Parties

A contract of guarantee or a suretyship involves three parties. The party who undertakes to be responsible for another is the guarantor, or the surety; the party to whom the guarantee is given is the creditor; and the party who has primary liability is the principal debtor, or simply the principal. Because these three parties are distinct and have differing rights and obligations, it is important to identify exactly what role a party has in a guarantee or suretyship arrangement. 

Distinctions

The words surety and guarantor are often used interchangeably, and they have many similarities. Some states have abolished any distinction between them. However, in other states their legal usages differ. In a contract of suretyship, the shurety has liability coextensive with that of the principal debtor. The surety has direct and primary responsibility for the debt or obligation just like the primary debtor. the surety's obligation, then, is identical with the debtors.

A guarantor's obligation is secondary to that of the principal debtor. As a secondary obligation, the guarantee agreement may not even be executed at the same time or in the same instrument as the principal obligation. The guarantor's promise to pay comes into effect only in the event the principal defaults. The guarantor's obligation does not arise simultaneously with the principal's. The obligation depends upon the happening of another event, namely, the failure of the principal to pay. 

For the most part, the law of suretyship applies with equal force to both paid sureties and accommodation sureties. A bail bondsman is a paid surety. An accommodation surety agrees to be a surety as a favor to the principal. A parent who cosigns a note for a teenager constitutes an accommodation surety. In some instances the contract of a paid surety will be interpreted strictly. Thus, in the case of acts claimed to discharge the surety, courts sometimes require paid sureties to prove that they have actually been harmed by the conduct of the principal before allowing recovery.

Importance of Making a Decision Distinction

In states that recognize a difference between guarantors and sureties, the distinctions involve three aspects:

1. Form
2. Notice of default
3. Remedy

Form. All the essential elements of a contract must be present in both contracts of guarantee and contracts of suretyship. However, a contract of guarantee must be in writing (see Illustration 1), whereas most contracts of suretyship may normally be oral.

ILLUSTRATION 1 A Letter of Guarantee

The Uniform Commercial Code (UCC) provides: "The promise to answer for the debt, default, or obligation of another must be in writing and be signed by the party to be charged or by his authorized agent." This provision should apply to a promise that creates a secondary obligation, which means an obligation of guarantee, not to a promise that creates a primary obligation or suretyship.

Notice of Default. A creditor need not notify sureties---parties primarily liable for the debt---if the principal defaults. On the other hand, the creditor must notify guarantors. In some states, failure to give notice does not of itself discharge the guarantyship. A guarantor damaged by the failure to receive notice may offset the amount of the damage against the claim of the creditor.

Remedy. In the case of suretyship, the surety assumes an original obligation. The surety must pay. Sureties have liability as fully and under the same conditions as if the debt where theirs from the beginning. The rule is different in many contracts of guarantee. In a conditional guarantee the guarantor has liability only if the other party cannot pay.

For example, Arnold writes, "Let Brewer have a suit; if he cannot pay you, I will." This guarantee depends upon Brewer's ability to pay. Therefore, the seller must make all reasonable efforts to collect from Brewer before collecting from Arnold. If Arnold had written, "Let Brewer have this suit, and I will pay you," an original obligation would have been created for which Arnold would have been personally liable. Therefore, Arnold would be deemed a surety if the understanding was that Arnold was to pay for the suit.

Rights of the Surety and the Guarantor

A guarantor and a surety have the following rights:

1. Indemnity
2. Subrogation
3. Contribution
4. Exoneration

Indemnity. A guarantor or surety who pays the debt or the obligation of the principal has the right to be reimbursed by the principal, known as the right of indemnity. The guarantor or the surety may be induced to pay the debt when it becomes due to avoid the accumulation of interest and other costs on the Debt.

Subrogation. When the guarantor or the surety pays the debt of the principal, the law automatically assigns the claim of the creditor to the guarantor or surety. The payment also entitles the guarantor or surety to all property, liens, or securities that were held by the creditor to secure the payment of the debt. This right of subrogation does not arise until the creditor has been paid in full but it does arise if the surety of the guarantor has paid a part of the debt and the principal has paid the remainder.

Contribution. Two or more persons jointly liable for the debt, default, or obligation of a certain person coguarantors or cosureties. Guarantors or sureties who have paid more than their proportionate share of the debt are entitled to recover from the other guarantors or sureties the amount in excess of their pro rata share of the loss. This is the right of contribution. It does not arrive until the surety of the guarantor has paid the debts of the principal in full or has otherwise settled the debt. 

Exoneration. A surety or guarantor they call upon the creditor to proceed to compel the payment of the debt otherwise the surety or guarantor will be released. This is the right of exoneration. The creditor may delay in pressing the debtor to pay because of the security of the suretyship. A creditor who fails to compel payment when due releases the surety in cases where the debtor can pay. The surety then has no uncertainty concerning potential liability.

Discharge of a Surety or Guarantor

The usual methods of discharging any obligation, including performance, voluntary agreement, and bankruptcy of the surety or guarantor, discharge both a surety and a guarantor. However, some additional acts that will discharge the surety or the guarantor include:

1. Extension of time
2. Alteration of the terms of the contract
3. Loss or return of collateral by the creditor

Extension of Time. If the creditor extends the time of the debt without the consent of the surety or the guarantor and for a consideration, the surety or the guarantor is discharged from further liability.

Alteration of the Terms of the Contract. A material alteration of the contract by the creditor without the surety's or guarantor's consent discharges the surety or guarantor. In most states the change must be prejudicial to the surety or the guarantor. A reduction in the interest rate has been held not to discharge the surety, whereas the change in the place of payment has been held to be justifying a discharge of the surety. A material change in a contract constitutes substituting a new contract for the old. The surety guaranteed the payment of the old contract, not the new one.

Creditor's Loss or Return of Collateral. If the creditor through negligence loses or damages collateral security given to secure the debt, a surety or guarantor is discharged. The return of any collateral security to the debtor also discharges a surety of or guarantor. Collateral must be held for the benefit of the surety until the debtor pays the debt in full.

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 471-475*

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Business Law (part 53)

People crushed by laws, have no hope but to evade power. If the laws are their enemies, they will be enemies to the law; and those who have most to hope and nothing to lose will always be dangerous.

Edmund Burke

Types of Insurance (part C)

by

 Charles Lamson

 Automobile Insurance

 Automobile insurance is a special type of property insurance and includes two major classes of insurance: physical damage insurance (including fire, theft, and collision) and public liability insurance (including bodily injury and property damage). To understand the law one must know what specific risk the insurance carrier assumes and the terms of the policy covering that specific risk. The term automobile insurance refers to insurance that the insured obtains to cover a car and the injuries that the insured and other members of the family may sustain. The term also refers to liability insurance, which protects the insured from claims that third persons may make for injuries to them or damage to their property caused by the insured.

Physical Damage Insurance

As the name implies, physical damage insurance covers the rules of injury or damage to the car itself. It includes:

1. Fire insurance
2. Theft insurance
3. Collision insurance
4. Comprehensive coverage

Fire Insurance

Much of the law of property insurance discussed in the preceding posts applies to automobile insurance. The fire policy covers loss to a car damaged or destroyed by the burning of any conveyance upon which the car is being transported, such as a barge, boat, or train. Fire insurance can be obtained separately but is normally included in comprehensive coverage.

Theft Insurance

Theft is taking another's property without the owner's consent with the intent to wrongfully deprive the owner of the property. Automobile theft insurance either by law or by contract normally covers a wide range of losses. Obtaining possession of a car and converting it to one's own use to the exclusion of or inconsistent with the rights of the owner is known as conversion. Taking another's car by force or threat of force is known as robbery. In some states the automobile theft policy must cover all these losses. The policy itself may define theft broadly enough to cover theft, conversion, and robbery. Unless the policy is broadened either by law or by the wording of the policy, a theft policy covers only the wrongful deprivation of the car without claim of right.

Automobile theft Insurance usually covers pilferage of any parts of the car but not articles or clothes left in the car. It also covers any damage done to the car either by theft or attempted theft. It does not cover loss of use of the car unless the policy specifically provides for this loss.

Collision Insurance

The standard collision policy covers all damage to the car caused by a collision or upset. A collision occurs whenever an object strikes the insured car or the car strikes an object. Both objects need not be automobiles nor be moving. Frequently collision policies require the collision to be accidental. A court held that a rolling rock that crashed into a parked car constituted a collision. Likewise, there was a collision when a horse kicked the door of the insured automobile. However, no collision occurs when the colliding object consists of a natural phenomenon, such as rain or hail. If the language of an insurance policy can be given to different reasonable interpretations, the interpretation most helpful to the insured is used.

Practically all collision policies void or suspend coverage if a car hauls a trailer unless insurance of the same kind carried on the car is placed on the trailer. The question of interpretation then arises as to what constitutes a trailer. A small boat trailer and a small two-wheel trailer generally are not considered trailers, but horse or cattle trailers are.

If a car has collision insurance but not fire Insurance, the policy will, in most states, pay both the fire loss and the collision loss occurring in the same wreck so long as the fire ensues after collision and is a direct result of it.

Most collision insurance policies have a deductible clause. A deductible clause provides that the insurance company will pay for damages to the car in excess of the specified amount. The specified amount, called the deductible, is usually $100 to $250. The insured must pay this amount. Suppose a collision results in $850 in damages to a car covered by $250 deductible collision insurance. The insured must pay the first $250 and the insurance company pays the remainder---$600. Policies without any deductible clause have extremely high rates. It is much cheaper for the insured to assume some of the risk.

An insurance company may pay the insured a claim for collision damage caused by someone else's negligence. If so, under the law of subrogation the company has the right to sue this other party to the collision for the damages.

Comprehensive Coverage

Insurance companies will write automobile insurance covering almost every conceivable risk to a car, such as wind storm, earthquake, flood, strike, spray from trees, malicious mischief, submersion in water, acid from the battery, riot, glass breakage, hail, and falling aircraft. A comprehensive policy may include all of these risks plus fire and theft. A comprehensive policy covers only the hazards enumerated in the policy, and collision is normally excluded.

Public Liability Insurance

The second major division of automobile insurance, public liability insurance, protects third persons from bodily injury and property damage.

Bodily Injury Insurance

Bodily injury insurance covers the risk of bodily injury to the insured's passengers, pedestrians, or the occupants of another car. The insurance company obligates itself to pay any sum not exceeding the limit fixed in the policy for which the insured may be personally liable. If the insured has no liability for damages, the insurance company has no liability except the duty of defending the insured in court actions brought by injured persons. This type of insurance does not cover any injury to the person or the property of the insured.

Coverage under an automobile liability policy is usually written as 10/20/5, 25/50/10, 100/300/15, or similar combinations. The first number indicates that the company will pay $10,000, $25,000, or $100,000, respectively, to any one person for bodily injury in any one accident. The middle number fixes the maximum amount the company will pay for bodily injury to more than one person in any one accident. The third figure sets the limit the company will pay for property damage. This usually is the damage to the other person's car but may include damage to any property belonging to someone other than the insured. 

A bodily injury insurance policy does not cover accidents occurring while an underage person drives the car. It may not cover accidents occurring while the car is rented or leased unless specifically covered, while the car is used to carry passengers for a consideration, while the car is used for any purpose other than that stated in the policy, or while it is used outside the United States and Canada. Some policies exclude accidents while the car is being used for towing a trailer or any other vehicle used as a trailer. These are the ordinary exclusions. Policies may have additional exclusions of various kinds.

The insured may not settle claims or incur expenses other than those for immediate medical help. As in the case of property insurance, the insurer has a duty to defend any lawsuits and the insured must give prompt notice of any claims or suits. In the event that the insurance company pays a loss, it is subrogated to any rights that the insured has against others because of such losses. 

Property Damage Insurance

In automobile property damage insurance the insurer agrees to pay, on behalf of the insured, all sums the insured may be legally obligated to pay for damages arising out of the ownership, maintenance, or use of the automobile. The liability of the insurer, however, is limited as stated in the policy.

The policy usually provides that the insurer will not be liable in the event that the car is being operated, maintained, or used by any person in violation of any state or federal law as to age or occupation. The insurer has no liability for damage to property owned by, leased to, transported by, or in charge of the insured.

Medical Payments and Uninsured Motorist Insurance

In addition to physical damage and public liability insurance, there is insurance that covers injury to the insured or passengers in the insured's car. Medical payments cover bodily injury and are paid regardless of other insurance. Uninsured motorist coverage protects the insured when injury results from the negligence of another driver who does not have liability insurance. 

Recovery Even When at Fault

Normally the injured party must prove the driver of the insured car was negligent or at fault before the insurer becomes liable. Frequently, both drivers are negligent. Formerly, if the driver who sues negligently contributed even slightly to the accident, no recovery could be had. This harsh rule has been replaced in most states by the last clear chance rule. This rule states that if one driver is negligent but the other driver had one last clear chance to avoid hitting the negligent driver and did not take it, the driver who had the last clear chance is liable.

In a number of states comparative negligence statutes have also modified the harshness of the common law rule as to contributory negligence. These statutes provide that the contributory negligence of the plaintiff reduces the recovery but does not completely bar recovery from a negligent defendant. That means the court balances the negligence of each party against that of the other. Suppose Roemer and Griffero have an automobile accident and both were negligent. It is determined that the damage to Roemer's car was caused 60% by Griffero and 40% by Roemer's own negligence. If the total damage to Roemer's car is $2,500, Griffero will have to pay 60% or $1,500.

Some states have established no-fault insurance. Under this plan, insurance companies pay for injuries suffered by their insured's nomad wait for it wait for it wait for it under this plan, insurance companies pay for injuries suffered by their insureds no matter who has responsibility for negligence. States use this no-fault plan for a limited amount of damages. Above this amount, the fault rules apply. The purpose of no-fault insurance is to make sure that injured parties are compensated promptly and reduce the number of lawsuits. It is assumed that it is faster and easier to collect from your own insurance company than from the insurance company of the other driver.

Required Insurance

People with poor driving records might find it difficult or impossible to obtain mandatory automobile insurance. When the law requires a person to carry insurance in order to be permitted to drive but no insurance company will sell a policy, a state agency will assign this driver to an insurance company. The company must issue the policy under the assigned risk rule. States require all insurance companies to accept the drivers assigned in this manner. 

INTERNET RESOURCES FOR BUSINESS LAW

Name	Resources	Web Address
Highway Loss Data Institute	The Highway Loss Data Institute contains news and links to injury, collision, theft loss, state laws, and other related sites.	carsafely.org
National Association of Insurance Commissioners (NAIC)	The NAIC lists links to some state workers insurance sites.	naic.org
A.M. Best Company	The A.M. Best Company site provides insurance information and company ratings.	ambest.com
Better Business Bureau	Both national and regional Better Business Bureaus offer information on understanding insurance, including homeowners.	bbb.org

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 464-468, 470*

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Name

Resources

Web Address

Highway Loss Data Institute

The Highway Loss Data Institute contains news and links to injury, collision, theft loss, state laws, and other related sites.

carsafely.org

National Association of Insurance Commissioners (NAIC)

The NAIC lists links to some state workers insurance sites.

naic.org

A.M. Best Company

The A.M. Best Company site provides insurance information and company ratings.

ambest.com

Better Business Bureau

Both national and regional Better Business Bureaus offer information on understanding insurance, including homeowners.

bbb.org